Japan has largely met the Bank of Japan’s (BoJ) price target, with inflation exceeding 2%. Signs suggest a broader rise in prices. Consumption in Japan is expected to grow modestly. The Tankan report shows that tariffs haven’t significantly impacted the economy.

Market Volatility Concerns

Concerns about market volatility due to US tariffs are easing. The US economy is stable, and the yen is losing value. The BoJ needs to adjust its monetary policy gradually. Currently, USD/JPY is up by 0.11%, trading at 150.75. The BoJ is Japan’s central bank, aiming for around 2% inflation. They started a very loose monetary policy in 2013, which included Quantitative and Qualitative Easing. In 2016, the BoJ introduced negative interest rates and began managing the yield on 10-year government bonds. In March 2024, they raised interest rates. This stimulus led to a weaker yen, but this trend reversed somewhat in 2024 when the BoJ maintained its loose policy.

Policy Unwinding

The BoJ is now unwinding its policy due to rising inflation and potential wage increases. The weaker yen and higher global energy prices have contributed to increasing inflation in Japan. A senior BoJ official has indicated that their inflation goal has largely been achieved, suggesting we prepare for further tightening of monetary policy. This means the gradual shift away from a loose policy, which started in 2024, will continue. We must consider possible interest rate hikes soon. Recent data supports this perspective, showing Japan’s core inflation has stayed above 2% for over a year, with the September 2025 rate at 2.5%. Additionally, this year’s spring wage negotiations resulted in an average salary increase of over 4%, strengthening consumer spending and causing inflation effects. These factors align with the central bank’s criteria for further normalization. For traders, this forecast points to a stronger yen. The gap between interest rates in Japan and other major economies, like the US, is likely to narrow. With USD/JPY near the 151 mark, we should prepare for potential downward pressure. Options strategies that benefit from a declining USD/JPY, such as buying put options, could become more appealing. The expectation of a gradual, multi-step process means the timing of future actions is uncertain, likely increasing currency volatility. This situation is ideal for traders using options to capitalize on price fluctuations, as implied volatility for yen pairs is expected to rise leading up to BoJ meetings. We should prepare for larger-than-usual price movements around these announcements. Looking back, the first rate hike in March 2024 marked a significant change after almost twenty years, and the BoJ has acted carefully since then. However, with the US economy avoiding a major downturn and fears of external shocks decreasing, the BoJ’s path forward is clearer. Today’s conditions for raising rates are much more favorable than they were a year ago. Create your live VT Markets account and start trading now.

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