Recent data from Japan supports the expectation that the Bank of Japan (BoJ) will raise interest rates in October. Real wages climbed 0.5% year-on-year in July, the first positive change since December. Household spending grew by 1.4% year-on-year, but this was below the expected 2.3% increase. Labour cash earnings jumped 4.1% year-on-year in July, beating last month’s 3.1% rise and the forecast of 3.0%. Bonus pay increased by 7.9%, and base pay rose by 2.6%. Following this data, the yen strengthened, making a rate hike more likely.

Minimum Wage Rise

Japan’s minimum wage will rise to ¥1,121 from ¥1,055, which boosts wage growth. ING predicts that the BoJ will raise rates by 25 basis points in October, thanks to strong wage growth and solid GDP progress in the first half of the year. Despite these promising economic signs, political and trade risks remain. A 15% tariff agreement between the U.S. and Japan adds external pressure. Plus, Prime Minister Shigeru Ishiba may face challenges within the ruling LDP, which could create political uncertainty in financial markets. The recent jobs and spending data, as seen on September 5th, 2025, strongly points to a likely BoJ rate hike next month. With real wages finally showing positive growth, the BoJ has good reasons to act. This is an important development we should prepare for in the upcoming weeks. Given the immediate rise of the yen following this news, traders might want to consider opportunities that benefit from a stronger currency. This could mean buying call options on the JPY or put options on the USD/JPY pair before the October meeting. Implied volatility in yen options is already increasing, indicating that the market is anticipating a significant movement.

Policy Normalization

This potential rate hike would continue the normalization of policy that started when the BoJ ended its negative interest rate policy in March 2024. Core inflation has been above the central bank’s 2% target for over two years, reinforcing the argument for tighter policy. This is happening while the yen is trying to recover from the multi-decade lows seen in 2023 and 2024. For those trading interest rates directly, now is a good time to look at futures on Japanese Government Bonds (JGBs). Positioning for rising short-term rates could be lucrative, as the market has already priced in a 25 basis point increase. We are also seeing more activity in derivatives tied to the short end of the yield curve. This outlook has clear implications for Japanese equities, especially the Nikkei 225. Higher borrowing costs usually pressure stocks, so we should be ready for possible weakness in the index. Hedging long equity portfolios with Nikkei put options or setting up short positions via futures could be a smart strategy. However, we must keep in mind the external risks, like the new 15% U.S. tariff and potential political instability in Japan’s ruling party. These factors could lead to unexpected volatility and suggest using strategies like straddles to trade on the uncertainty. These risks could slow the yen’s rise or even trigger a reversal if they worsen. Create your live VT Markets account and start trading now.

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