Japan’s core consumer inflation eased to 3.3% year-over-year in June, down from 3.7% in May, matching what economists predicted. This slowdown was mainly due to a smaller rise in energy prices, which went up by 2.9%. Meanwhile, food prices, excluding fresh items, surged to 8.2%. This data offers some comfort to the Bank of Japan (BOJ), which remains wary of uncertainty in global trade. Even with high price levels, the BOJ is likely to keep interest rates steady for now while weighing the economic effects of recent U.S. tariffs.

Central Banks Inflation Projections

The BOJ will revise its inflation forecasts at a meeting later this month. However, most economists agree that there won’t be any policy changes at this time. With an election coming up in Japan this weekend, rising living costs are a concern for the current government. Given the latest inflation figures, we believe the Bank of Japan will stick to its ultra-low interest rate policy. The drop in core inflation gives policymakers reasons to avoid tightening monetary policies. This stands in contrast to other major central banks, creating a significant difference in interest rates. As a result, the Japanese yen may face continued downward pressure. With U.S. Treasury yields much higher than those of Japanese government bonds, we expect the dollar-yen currency pair to remain strong, recently trading near multi-decade highs above 158. Strategies that benefit from a weak yen, like buying USD/JPY call options, seem promising for the upcoming weeks.

Potential For Japanese Equities

Therefore, we expect a positive outlook for Japanese equities, particularly for large exporters who gain from a weaker yen. This year, the Nikkei 225 has performed well, partly due to this trend, reaching levels not seen in over 30 years. We can consider index futures or call options to take advantage of potential further gains. The local situation supports this view, as a rate hike is politically challenging. While core inflation has decreased, food prices keep rising, and real wages have dropped for 25 straight months, worsening the cost-of-living crisis before the election. The government cannot risk an economic downturn that might come from higher borrowing costs. Although we expect continuity in policy, the upcoming central bank meeting poses a risk. Any unexpected changes in language or outlook could lead to a spike in short-term volatility in both the currency and equity markets. It might be wise to use options to protect existing investments or speculate on a brief market reaction to the announcement. Create your live VT Markets account and start trading now.

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