In June, Japan’s Producer Price Index (PPI) rose by 2.9% compared to last year. This matched expectations but was slower than the previous 3.2% increase. The month-on-month figure for June showed a decline of 0.2%, which was also in line with forecasts and the same as the prior month. The PPI, or Corporate Goods Price Index, measures wholesale prices in Japan. It reflects what businesses charge each other for goods and services, giving us insight into the country’s economic health. In simple terms, while wholesale prices in Japan are still increasing compared to last year, the growth rate is slowing down. A year-on-year increase of 2.9% means inflation pressures remain, but they are easing compared to May’s 3.2%. This suggests companies still face high costs but that the worst situation might be over for now. The consecutive month-to-month declines—both May and June showing a drop of 0.2%—indicate that upstream pricing is stabilizing. This doesn’t mean inflation is gone, but it highlights a difference between high prices and prices that keep rising. Currently, prices remain high but are not climbing as quickly. From our viewpoint, we are closely watching the reductions in price movement. This suggests that companies may be adjusting to raw material costs that peaked last quarter. With Japanese wholesale inflation slowing down, we are reevaluating our expectations for central bank movements. The Bank of Japan may not need to intervene aggressively right now. Short-term interest rate changes will likely show subtle shifts rather than major changes, unless consumer price data reflects this cooling trend. This indicates that we should be less aggressive with hedging yen-sensitive investments in the near term. Volatility expectations have already factored in the expected data, but interest rates could still change, especially if Friday’s consumer price index (CPI) differs from current projections. The key factor is deviation from expectations—a PPI outcome that aligns with forecasts won’t shock the market as much as an unexpected result would. When investing in Japan, we are focusing on inflation-sensitive trends and looking for consolidation patterns rather than breakouts. We’ve seen Kaneko’s forecast models support the cooling trend highlighted by this data, reinforcing our view that market conditions are easing since late Q1. Traders with concerns about medium-term risks should consider strategies that prioritize holding positions rather than making drastic directional bets. It’s important to remember that sectors related to industrial output are still adjusting to previous raw material price shocks. We’ve noticed that spread widening has decreased, particularly in manufacturing derivatives and energy-linked instruments. This aligns with the overall trend—prices aren’t dropping, but they aren’t rising quickly enough to cause concern. We should keep an eye on the next Bank of Japan summary, which could lead to quicker rate normalization if service sectors show increasing pressure. We’re monitoring cost of goods sold (COGS) ratios in quarterly earnings, as margin compression can signal adjustments in forward guidance. This directly affects expected volatility for domestic stocks and their options. In these conditions, we prefer structured positions with capped risk instead of open-ended exposure, especially with current momentum being sluggish. Responses to upcoming trade data will likely depend on confirming that this stabilization trend isn’t just a June anomaly. If it holds, spreads on interest rate swaps tied to Japanese data could realign, a trend we’ve noticed in recent interbank quotes following the report. For now, we will maintain our current approach, monitoring pace, deviations, and market breadth rather than chasing aggressive price changes. We’ll see how tomorrow’s data starts to influence the next short-term movement.

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