Japan’s exports fell for the fourth month in a row in August, mainly due to higher U.S. tariffs on automakers and manufacturers. Exports to the U.S. dropped by 13.8% compared to last year, the largest decline since early 2021. Automobile exports fell by 28.4%, and chipmaking equipment shipments nearly plunged by 39%. Some automakers have cut export prices to absorb tariff costs, while others have raised U.S. prices, impacting consumers. This situation, along with uncertainties in the U.S. economy, raises concerns about Japan’s production going into the end of the year. Overall, exports decreased by just 0.1% year-on-year, which was less than expected. Imports dropped by 5.2%, partly because of cheaper oil. The trade gap with the U.S. is now at its smallest since early 2023, but Japan still faced a broader deficit of ¥242.5 billion ($1.66 billion). Following a July agreement, Washington lowered baseline tariffs on Japanese goods to 15%, providing some relief, though this is still much higher than the pre-trade-war rate of 2.5% for automobiles. Economists believe Japan’s economy might shrink this quarter. The Bank of Japan’s Governor has promised to proceed cautiously with interest rate hikes because of potential external risks, as ongoing export weaknesses could negatively affect Japan’s economy.

Monetary Policy Concerns

With exports declining for four straight months, it seems unlikely the Bank of Japan will increase interest rates soon. The big difference in interest rates between Japan and the United States is likely to keep weakening the yen. This month, the USD/JPY pair has tested the 148 level, which suggests buying call options on this pair could be profitable as the yen depreciates further. The significant drop in shipments from automakers and chip manufacturers indicates that Japanese corporate earnings will struggle. This affects the Nikkei 225 index, where foreign investors have sold a net total of over ¥800 billion in shares for three consecutive weeks. We see a chance to buy put options on the Nikkei 225 or specific auto-sector ETFs for the fourth quarter.

Economic Indicators and Market Opportunities

This situation reminds us of 2022-2023 when a dovish BOJ and global economic pressures caused continued yen weakness. With the next BOJ policy meeting set for early October, we expect the implied volatility of yen currency pairs to rise from its current level of 9.5%. This could make strategies like long straddles appealing for those anticipating important policy changes. Despite lower import costs from cheaper oil, Japan is still facing a trade deficit, which places more pressure on the currency. A structural deficit means more yen are being sold to pay for foreign goods. We need to keep an eye on global energy prices, as any increase could worsen Japan’s trade balance and likely lead to a further decline of the yen. Create your live VT Markets account and start trading now.

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