Japan’s GDP for the second quarter surprised many with better-than-expected results. Business spending and net exports helped offset a drop in inventories. Preliminary data indicates a quarterly growth of 0.3%, surpassing the expected 0.1%. The annualized growth rate was 1.0%, which exceeded the forecast of 0.4% and improved from a previous decline of –0.2%. Nominal growth landed at 1.3%, slightly below the 1.4% estimate but better than the previous 0.9%. The GDP deflator decreased to 3.0%, lower than the projected 3.2%, while private consumption grew by 0.2%, hitting the 0.1% target.

Business Spending and Net Exports Help Growth

Notably, business spending rose by 1.3%, higher than the predicted 0.7% and above the earlier 1.1%. However, inventory’s impact on GDP was –0.3%, more negative than the expected –0.2%. In contrast, net exports contributed positively at 0.3%, exceeding the forecast of 0.1%. This marks the fifth straight quarter of GDP growth, with consumption and capital expenditures rising during this time. Following this data release, JGB futures and USD/JPY saw slight declines. The strong Q2 GDP results could spark expectations for further policy normalization from the Bank of Japan. With five quarters of growth behind them, pressure mounts on the central bank to consider another rate adjustment following the small hike in March 2025. We should anticipate increased volatility in Japanese Government Bond (JGB) futures as the market reacts to this news.

Trading Opportunities Amid Market Reactions

For currency traders, the initial dip in USD/JPY to around 157.80 reflects the positive domestic data, but this may not last long. The significant interest rate difference with the United States, where the Fed is maintaining rates near 4.75%, remains important. This suggests that any short-term strength of the yen might just be a temporary response, making short-term call options on USD/JPY a strategic choice to hedge against a rebound. The data provides a positive outlook for Japanese equities, as the 1.3% increase in business spending indicates strong corporate confidence. This solid capital expenditure is crucial for corporate earnings and should give a good boost to the Nikkei 225 index. Traders might consider buying Nikkei call options to benefit from potential gains in the upcoming weeks. Nevertheless, the Bank of Japan will also take note of the GDP deflator at 3.0%, which was slightly below expectations, and the latest national core CPI for July 2025, which eased to 2.8%. This mixed inflation picture gives the central bank reason to be cautious and possibly delay major policy changes. This uncertainty may result in choppy markets, making volatility-based strategies like straddles on the Nikkei a viable option. It’s important to remember the Bank of Japan’s historical hesitance to tighten policy too quickly, reflecting on the policy changes of the past two decades. They will likely want to see consistent wage growth and stable inflation figures before committing to a more aggressive rate hike approach. Thus, while today’s data is encouraging, we should expect the central bank to adopt a cautious strategy as autumn approaches. Create your live VT Markets account and start trading now.

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