The Bank of Japan (BOJ) Deputy Governor Himino said that Japan’s real interest rate is still low. He mentioned that raising rates could be beneficial if the economy and prices improve, but there are risks both for growth and inflation. Himino emphasized the need to look at basic projections without assumptions. While the Japan-US trade deal and US-China talks provide some clarity, the global economy remains unpredictable. He noted that changes in trade policy may not significantly impact Japan’s economy.

Inflation and Corporate Profits

Corporate profits may be under pressure due to a global slowdown and trade policy changes. Inflation is expected to remain steady at first but should eventually reach 2%. Although we are close to this goal, it has not been met yet, and Himino pointed out ongoing risks and uncertainties. Adjustments to monetary policy should focus on short-term interest rates instead of how much the government buys in bonds. A slow reduction in the BOJ’s balance sheet is recommended to maintain market stability. It’s important to find the right amount of bond purchasing, allowing market forces to dictate long-term rates. The BOJ’s plans for its ETF and J-REIT holdings will be influenced by previous experiences. The yen weakened after Himino’s comments, suggesting that rate hikes are expected, although no immediate actions are planned. The BOJ is indicating a very slow and steady approach to raising interest rates. This means we shouldn’t expect sudden drastic changes. With the US Federal Reserve keeping rates around 5.0% and the BOJ’s policy rate at only 0.25% after a slight hike in July 2025, the interest rate gap remains significant. This suggests that trading the yen against the dollar could still be profitable in the short term.

Market Strategies and Outlook

We see a chance in the Japanese government bond (JGB) market since the BOJ plans to cut its bond purchases. This could lead to long-term rates increasing more quickly than short-term rates, a situation known as a steepening yield curve. A strategy called a bearish steepener—selling long-dated JGB futures while keeping short-dated ones—could be helpful to take advantage of this change. For equity derivatives, the outlook is mixed, requiring caution when investing in the Nikkei 225. While a weak yen benefits Japanese exporters, there are concerns about corporate profits declining due to a global slowdown, especially since Q2 2025 GDP growth was revised to only 0.1%. Given this uncertainty, buying protective puts or using collar strategies on the Nikkei could be a wise choice to protect against potential losses. The latest core inflation data from August 2025, at 1.9%, supports the BOJ’s cautious stance. Since inflation hasn’t consistently reached the 2% target, the bank can justify moving slowly with further rate changes. Traders should therefore expect options pricing to reflect a low chance of a rate hike at the upcoming meeting. With the high level of global uncertainty, especially regarding trade policy, hedging is crucial. The BOJ has indicated that the negative effects of trade conflicts might be greater than expected. As such, maintaining long volatility positions or using derivatives to shield portfolios from sudden drops in the coming weeks is advisable. Create your live VT Markets account and start trading now.

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