Japan’s gross domestic product (GDP) deflator rose by 3.4% in the third quarter compared to a year earlier. This growth exceeded expectations, which predicted a 2.8% increase. The GDP deflator tracks the prices of all goods and services produced in Japan. An increase in this deflator indicates rising inflation. Japan’s economy faces various challenges, fluctuating between contraction and growth. Still, the latest data shows a shift in economic conditions. Analysts follow these numbers closely because they help gauge economic performance. Any differences from expected results can affect economic predictions and policies. Japan’s Q3 GDP deflator at 3.4% is a notable surprise, outpacing the 2.8% forecast. This suggests that inflation is stronger than anticipated, putting pressure on the Bank of Japan (BoJ) to rethink its very loose monetary policy sooner than expected. This inflation news is likely to boost the Japanese Yen. Recently, the USD/JPY exchange rate has stabilized around 151, but this news could push the pair lower as the market anticipates a more aggressive BoJ. Traders might consider buying JPY call options or selling USD/JPY futures, aiming for a drop to the 148 support level in the coming weeks. For stock markets, this news poses challenges for the Nikkei 225. We remember the global market downturn during the rate hikes of 2022 and 2023, while Japan’s market generally remained stable due to BoJ policies. Traders should think about protecting long positions with put options or starting short positions using Nikkei futures, as rising borrowing costs could hurt corporate profits. The Japanese government bond (JGB) market might see the most significant changes. The 10-year JGB yield, which the BoJ has tried to keep low, recently rose to 1.12% for November 2025, marking a multi-year high. This inflation rate suggests a move toward 1.25% or more seems likely, leading traders to increase short positions on JGB futures. Overall, we expect volatility to rise across all Japanese assets. The BoJ has frequently surprised with its inaction, but this new data might push it to act in the next policy meeting. This could make strategies that benefit from price fluctuations, such as buying straddles on the Yen, worthwhile.

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