Japan’s preliminary 1Q GDP, plus April trade and inflation figures, are due this week. GDP is forecast at 1.8% QoQ saar, up from 1.3% in the prior quarter, keeping a 0.5% full-year GDP forecast in place.
Exports remained firm and industrial output rose in 1Q, supported by AI demand and higher semiconductor exports. Business investment also increased, led by AI- and semiconductor-related capital spending.
Consumption appears weaker. Retail sales rose in 1Q, including spending by foreign visitors, but the BoJ’s consumption activity index points to slower domestic household spending.
April trade data are expected to show a return to a trade deficit as export growth slows and imports rise. Higher oil prices are linked to the weaker trade balance and weigh on the JPY, with FX intervention effects expected to be temporary unless oil prices fall.
April CPI is expected to remain at 1.5% year-on-year, supported by government energy subsidies. With inflation at 1.5% YoY, a BoJ rate rise is seen as unlikely in June, with a 25bp increase expected in July.
The outlook suggests Japan’s economy is holding up, but not enough to push the Bank of Japan into an early rate hike in June. With inflation staying mild, the central bank is expected to wait until July. This delay creates a clear window for trading on the policy differences between Japan and other major economies.
For the Japanese yen, the path of least resistance appears to be further weakness, especially against the US dollar. The trade balance is slipping back into a deficit as oil prices, with WTI crude currently trading over $85 a barrel, increase import costs. With the Federal Reserve holding interest rates steady, the significant yield gap makes shorting the yen an attractive carry trade, pushing the USD/JPY pair past the 161.50 mark recently.
We saw a similar pattern when looking back at 2024, where repeated government interventions only provided temporary strength for the yen before the fundamental trend took over again. Therefore, any sharp JPY rally driven by official warnings or action in the coming weeks could be seen as a selling opportunity. Using call options on USD/JPY with expirations after the June BoJ meeting can be an effective way to position for this.
This environment is also supportive for Japanese equities, particularly the Nikkei 225 index. A weaker yen directly boosts the overseas profits of Japan’s large exporters, and strong investment in the AI and semiconductor sectors provides a solid tailwind for growth. With the Nikkei having sustained its position above the 41,000 level, using index futures is a direct way to gain exposure to this positive momentum.
The main risk remains sudden currency intervention from the Ministry of Finance, which can cause extreme short-term volatility. This suggests that using defined-risk option strategies, like bull call spreads on USD/JPY, could be more prudent than holding outright futures positions. These structures allow us to profit from the expected JPY weakness while capping potential losses from an unexpected policy shift or intervention.
