Japan’s inflation rate for August shows a decrease in core CPI, dropping to 2.7% compared to the same time last year. This is in line with forecasts and down from 3.1% in July, but still above the Bank of Japan’s target of 2%. The core-core index, which leaves out fresh food and fuel, rose by 3.3% year-on-year, slightly lower than July’s 3.4%. This data isn’t a huge relief for households, but it is enough to keep the Bank of Japan cautious.

Upcoming BoJ Policy Decision

Attention now shifts to the upcoming policy decision by the Bank of Japan. Most analysts expect the Bank to maintain its current interest rate. At the same time, exchange rates have shown only slight changes. With inflation still higher than the Bank of Japan’s goal, we believe the current calm in the currency markets is temporary. Though inflation slightly decreased in August, it doesn’t lessen the growing pressure on the BoJ to take action soon. For now, expectations point to no change, creating a buildup for the Japanese yen. We anticipate a rise in market volatility in the coming weeks, regardless of the BoJ’s immediate choices. The one-month implied volatility on USD/JPY options has increased to 9.8%, up from a summer average of 7.5%. This suggests traders are purchasing options to either hedge against or speculate on a significant price change after this quiet period.

Historical Context and Market Strategies

Looking back, we remember the sharp daily fluctuations in the yen during the Ministry of Finance’s interventions in 2022 and 2023. Although the context is different now, it serves as a reminder of how quickly the yen can adjust when something triggers a move. We are considering strategies such as long straddles on the yen, which can benefit from significant price movements in either direction. In the bond market, the yield on the 10-year Japanese Government Bond is around 1.2%, a level not seen since the early 2010s. This suggests that the market is anticipating an end to negative interest rates. Shorting JGB futures is a viable strategy to capitalize on yields slowly rising. For stocks, any hint of tightening monetary policy from the BoJ could strengthen the yen, adversely affecting Japanese exporters in the Nikkei 225. We have noticed that the Nikkei’s put-to-call ratio has risen to 1.2 over the past week, indicating increased demand for downside protection. Buying put options on the index can provide a good hedge against this risk. Create your live VT Markets account and start trading now.

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