Japan’s economy shrank by 0.6% in the third quarter (Q3) of 2025, as reported by Japan’s Cabinet Office. This decline was worse than the expected 0.5% drop and was a decrease from a previous estimate of 0.4%. On a yearly basis, GDP fell by 2.3% in Q3, compared to the earlier estimate of a 1.8% decline, which was also shy of the anticipated 2.0% drop.

Currency Impact

The USD/JPY currency pair was trading down by 0.05% at 155.23. A shrinking GDP typically hurts a nation’s currency, signaling an economy that is contracting. Gross Domestic Product (GDP) measures how an economy grows over time, often compared across quarters or years. Rapid GDP growth can lead to inflation, causing central banks to raise interest rates, which tends to strengthen the currency. In contrast, declining GDP usually weakens the currency. For commodities, higher GDP growth can negatively impact gold prices. This happens because rising interest rates make holding gold less attractive compared to interest-earning investments. Today’s report shows Japan’s economy is weaker than expected, contracting by 0.6% in Q3. This poor performance suggests that the Bank of Japan is unlikely to raise interest rates in the near future, reinforcing our strategy of using the low-yield yen to invest in higher-yield currencies.

Interest Rate Gap

The data indicates that the interest rate gap between Japan and other major economies will remain. For example, Japan’s core inflation dropped to 1.8% in November 2025, which eases any need for the central bank to tighten monetary policy. In comparison, the United States has a benchmark rate at 3.5%, making dollars a more attractive option than yen. In the next few weeks, we should think about buying USD/JPY call options to prepare for more yen weakness. Options with a strike price around 157, expiring in January or February 2026, could help us profit from a rise in the currency pair. This approach limits our potential loss to the cost of the options. For equity derivatives, this economic slowdown might actually help the Nikkei 225 index. A weaker yen increases the value of overseas earnings for Japan’s major export-driven companies, which make up the index. From 2022 to 2024, we often saw the Nikkei rally when the yen fell, a pattern we believe will continue today. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now