The Bank of Japan (BoJ) is expected to keep its short-term policy rate at 0.5% after a two-day meeting. There are growing concerns about how U.S. tariffs and the slowing U.S. economy might affect Japan’s recovery. Governor Kazuo Ueda will discuss these topics in a press conference, as the market looks for clues on possible future rate hikes. Analysts think the BoJ will likely stick to its current policy in October, given the uncertainty surrounding the impact of U.S. tariffs on Japan’s exports and corporate profits.

Economists’ Predictions

A Reuters survey of economists shows mixed views on when the next 25 basis point hike might happen, but many believe it could occur by early 2026. Opinions within the BoJ itself vary; some members warn against negative real borrowing costs due to ongoing food inflation and a tight job market. Japan’s inflation has been above the BoJ’s 2% target for over three years, mainly due to rising rice and food prices. The political scene adds to economic uncertainty, especially with a leadership contest in Japan’s ruling party after Prime Minister Shigeru Ishiba’s resignation. Governor Ueda is likely to emphasize the BoJ’s careful approach regarding any gradual policy changes. With the Bank of Japan expected to maintain its policy rate at 0.5% this Friday, the focus will shift to Governor Ueda’s upcoming press conference. His comments on U.S. economic challenges and tariffs will be crucial, presenting a binary risk for the yen. This situation makes it risky to place strong bets before the meeting. The mixed signals of high domestic inflation and slowing U.S. growth create a perfect setup for increased currency volatility. We are currently seeing one-month implied volatility for the USD/JPY pair around 11.5%, up from about 9% last month. Options strategies that benefit from significant movements in either direction, like long straddles, may perform well in the coming weeks.

External Pressures on Japan’s Economy

The Bank of Japan’s caution is supported by recent U.S. data. The final reading for U.S. Q2 GDP was revised down to just 1.1%, and August retail sales were flat. This raises the risk that a U.S. slowdown could negatively impact Japanese exports, making a near-term BoJ rate hike in October unlikely. Reflecting on the past, we recall the historic decision in March 2024 to end negative interest rates, although the normalization process has been slow. Japan’s core inflation was at 2.7% in August, significantly above the 2% target for over three years, yet the BoJ remains hesitant. This difference between domestic conditions and external risks creates tension in the market. The political landscape also contributes to uncertainty, with the ruling party’s leadership election set for October 4 after the prime minister’s resignation. Political transitions often lead to a desire for stability, reinforcing the belief that the BoJ will maintain its current stance. Any hawkish move from Governor Ueda would thus be a major market event. Therefore, our focus should be on strategies that can take advantage of this uncertainty rather than betting on a specific outcome. In addition to currency options, we are monitoring movements in Japanese Government Bond futures. Any subtle changes in Ueda’s language about future rate hikes could significantly affect the bond market. Create your live VT Markets account and start trading now.

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