Japanese companies are feeling less worried about US trade policies and are seeing strong demand in tech sectors. However, rising labor costs and a shortage of workers are making them cautious about the future. Companies noted that US tariffs are having less impact, and there is strong demand for AI chips, which are good signs. On the downside, concerns about labor and high prices affecting consumer spending are issues.

Cost Pass-Through and Demand

Businesses are optimistic because they can pass on costs and see strong demand. However, they are still worried about tariffs and labor shortages. Some non-manufacturing firms mentioned that high prices are lowering tourist demand. Retailers and real estate companies are concerned about Japan-China relations. As of now, the USD/JPY exchange rate dropped by 0.03% to 155.85. The Bank of Japan (BoJ) manages the country’s monetary policy, aiming for a 2% inflation target. Since 2013, it has used Quantitative and Qualitative Easing (QQE) and negative interest rates to encourage inflation. These measures have weakened the Yen against other currencies, especially compared to different policies from other central banks. In 2024, the BoJ is moving away from its ultra-loose policies.

Policy Changes and Economic Impact

The BoJ adjusted its policy due to a weaker Yen and rising energy prices pushing inflation above 2%. The potential for higher wages also influenced this change. The latest Tankan survey indicates a split in Japan’s economy, creating unique opportunities. Strong confidence among exporters, especially in the AI sector, contrasts with worries about rising costs and declining domestic consumption. This mixed outlook suggests the Bank of Japan will maintain a cautious approach, promoting stability in policy until early 2026. For Nikkei 225 options, the positive outlook for manufacturers indicates support for the index, which is likely to stabilize around the 42,500 level throughout much of 2025. However, struggles in domestic retail and real estate may hinder any major growth. This scenario suggests strategies like selling covered calls or setting up iron condors to take advantage of price ranges. On the currency side, with the USD/JPY at 155.85, the yen remains weak. Japan’s core inflation has been stable at around 2.5% this year, but this report likely leads the BoJ to avoid aggressive rate increases that would strengthen the yen. The significant interest rate gap with the US will continue to favor long USD/JPY positions, making call options a valid strategy, although we should be aware of potential comments from the Ministry of Finance, similar to what we observed in 2024. Ongoing labor shortages and rising costs are driving inflation, which would typically push bond yields up. However, the BoJ’s gradual policy changes since its first rate hike in March 2024 show that they are primarily concerned about the economy’s health. Thus, Japanese Government Bond yields are likely to remain low, making trades that bet against a rapid increase in yields attractive for the coming weeks. Create your live VT Markets account and start trading now.

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