Japan’s stock market is struggling largely because of China’s restrictions on exports that are beneficial for military use in Japan. While crude oil prices have fallen significantly, cutting Japan’s energy import costs, the yen hasn’t responded much. President Trump announced that Venezuela will send between 30 to 50 billion barrels of oil to the US, benefiting Venezuela while being under US control. This indicates that Trump will actively pursue Venezuelan oil.

Growing China-Japan Tensions

Tensions between China and Japan are rising, which may lead the Bank of Japan (BoJ) to be cautious about changing interest rates. China’s export controls, especially on rare earth materials, could hurt Japan’s automotive industry. Additionally, an anti-dumping investigation into Japan’s dichlorosilane exports may worsen these tensions. These issues could further strain their relationship in the upcoming weeks. Despite slight decreases in yields in the US, UK, and Germany, Japan’s long-term government bonds (JGBs) are seeing upward pressure on yields. Investors are feeling anxious ahead of the 30-year JGB auction. Previous auctions after Liberation Day had mixed results, but December’s strong auction made it clear that investors might be attracted to these yields. Ongoing inflation, relaxed monetary policies, and increased spending create a challenging economic environment, likely causing the yen to remain weak. Upcoming wage data could affect the yen’s volatility, as rising wages support the BoJ’s goals for price stability. With tensions with China rising, we see risks for Japanese equities in the short term. The possibility of export restrictions on rare earths is especially alarming for Japan’s automotive and technology sectors, since China processes around 90% of the global supply. Traders might want to consider buying put options on the Nikkei 225 to protect against a potential market drop in the coming weeks.

Weak Yen Forecast

The yen is expected to stay weak against the dollar, currently hovering around the 155 mark. The risk that the Bank of Japan may delay another interest rate increase due to these geopolitical tensions supports this outlook, similar to the cautious policy we observed throughout much of 2025. We suggest considering USD/JPY call options as a way to manage the risk of further yen underperformance. In the bond market, we anticipate continued pressure on long-term Japanese Government Bonds (JGBs). With 30-year JGB yields reaching 2.15% yesterday—levels not seen in over a decade—the market is clearly on edge ahead of tomorrow’s auction. Shorting JGB futures might be a direct approach to profit from the expectation that persistent inflation and government spending will raise long-term yields. Volatility will be key, especially with tonight’s wage data expected to show a growth rate of around 2.2%. Though this indicates a slight slowdown, it is still strong enough to keep the BoJ concerned, potentially causing significant movements in both the yen and JGBs. This situation suggests that option strategies designed to benefit from large price fluctuations, regardless of direction, could be advantageous. Create your live VT Markets account and start trading now.

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