Japan’s manufacturing sector shrank in July, with a preliminary PMI reading of 48.8. This is lower than the expected 50.2 and the previous reading of 50.1. The contraction was driven by uncertainty over U.S. trade policy and new tariffs, leading to a drop in output and new orders. In contrast, the services sector grew, scoring 53.5. This marks the fastest growth in five months, fueled by strong domestic demand. However, export orders fell for the first time in seven months, and job growth in this sector hit a nearly two-year low.

Divergence Between Sectors

The data shows a clear divide between Japan’s manufacturing and services sectors. The manufacturing contraction, now below the crucial 50-point mark, suggests a bearish outlook for export-focused industries like automakers and electronics. We’re considering buying put options on the Nikkei 225 index or on specific industrial stocks that respond to global demand. This economic weakness may push the Bank of Japan to hold off on significant monetary tightening, keeping the interest rate gap wide with the United States. The yen has already fallen past 160 to the dollar this year, reaching a 34-year low. This report could worsen the yen’s decline. We see potential in buying USD/JPY call options to benefit from further depreciation of the yen. While the services sector seems strong, the details reveal underlying issues. The first drop in export orders in seven months and slow job growth signal that the domestic economy is not immune to global trends. The latest Tankan survey from the central bank also showed a decline in business confidence among large non-manufacturers, supporting a cautious approach.

Unusual Economic Situation

Normally, a weak economy drives demand for safe-haven currencies like the yen. However, the current interest rate environment has changed that dynamic. This creates a rare situation where both the yen and the stock market might weaken at the same time. We should be ready for increased volatility and consider trading directly through derivatives linked to market fluctuations. Create your live VT Markets account and start trading now.

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