Japanese stocks saw their biggest drop in almost four months. The Nikkei 225 Index fell by 1.8%, and the broader Topix decreased by 1.5%. Concerns are growing about the US economy and the political situation in Japan. Speculation about Prime Minister Ishiba potentially resigning is on the rise, even though he has denied it.

Market Volatility And Options Strategy

The Japanese markets are facing a significant decline due to worries about the US economy and local political stability. This uncertainty has pushed the Nikkei Volatility Index up to nearly 28, a sharp rise from the low 20s we observed in July 2025. For traders, this means that the cost of buying options—used for hedging or speculation—has increased. Given the potential for further declines, buying put options on the Nikkei 225 seems like a wise defensive strategy. This strategy is supported by last week’s disappointing US non-farm payrolls data, which indicated slower job growth than expected. These puts can serve as insurance for portfolios heavily invested in Japanese stocks while the situation with Prime Minister Ishiba remains uncertain. We are also monitoring the USD/JPY currency pair, which has dipped below the 155 level due to the ongoing instability. A weaker yen is usually beneficial for Japan’s large exporters, which may help stabilize the broader market and prevent a severe collapse. This situation suggests that selling out-of-the-money call options could be a good strategy, as a significant rally is unlikely.

Historical Context And Future Outlook

We recall the market’s reaction when Prime Minister Abe resigned in August 2020. Initially, the market was shocked, but it quickly stabilized and recovered as investors gained confidence in the policies of his successor. This historical context indicates that although current political issues are causing a decline, a clear outcome could lead to a quick recovery. Looking forward, we are waiting for Japan’s preliminary Q2 GDP data, set to be released around August 15th. If the growth figure is below the expected 0.3%, it will confirm fears of a domestic slowdown and likely put additional pressure on stocks. Traders should also be prepared for the upcoming US inflation report on August 13th, as any surprises there will impact global markets. Create your live VT Markets account and start trading now.

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