Japan’s economic strategy aims to boost inflation by increasing wages. In July, real wages grew by 0.5% compared to the previous year. However, household spending only rose by 1.4%, falling short of the expected 2.3%. On a monthly basis, household spending jumped by 1.7% from June to July, surpassing the anticipated 1.3%. This was a positive shift from a 5.2% drop the previous month.

Growth in Wage Data

Wage data showed encouraging signs with a 3.3% year-over-year rise in overtime pay for July, up from a 0.56% increase earlier. Total cash earnings also grew, reaching a 4.1% year-over-year rise, exceeding the expected 3.0% and following a previous gain of 3.1%. The growth in inflation-adjusted real wages was mainly driven by strong summer bonuses and steady increases in base pay. Special payments rose by 7.9%, while regular pay increased by 2.5%. Overtime pay had its strongest growth since late 2022, contributing to the overall 4.1% rise in total cash earnings—this is the fastest increase in seven months. The July wage data signals that the Bank of Japan might soon normalize its policy. For the first time in seven months, real wages increased, which aligns with the sustainable, demand-driven inflation the central bank seeks. This is crucial as core inflation has been above the bank’s 2% target for over a year, with the latest August 2025 data showing a 2.1% increase.

Market Reactions and Considerations

Given this, we should prepare for a stronger yen in the upcoming weeks. The prolonged weakness that saw the USD/JPY pair exceed 160 in 2024 could reverse quickly if the market anticipates an end to negative interest rates. Strategies like buying puts to profit from a decline in the USD/JPY pair are looking increasingly appealing. Pressure on Japanese Government Bonds (JGB) is also expected to rise. The Bank of Japan’s Yield Curve Control has maintained the 10-year JGB yield near its 1.0% cap for most of 2025. This cap could be tested or even lifted, making short positions on JGB futures a sensible hedge against a possible hawkish shift from the bank. For Japanese stocks, this positive news could create challenges. A stronger yen impacts the overseas earnings of export-focused companies that dominate the Nikkei 225 index. Therefore, it’s wise to consider protective put options for the Nikkei 225, especially since the index fell after the last significant policy change in late 2023. Create your live VT Markets account and start trading now.

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