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    Japan’s year-on-year monetary base decreases to -9.8% in December, down from -8.5% previously

    by VT Markets
    /
    Jan 6, 2026
    Japan’s monetary base fell by 9.8% year-on-year in December, following an 8.5% drop the month before. The monetary base is an important measure of the money supply. It includes cash in circulation and deposits that banks hold at the central bank.

    Japan’s Monetary Base Decline

    The ongoing decrease in Japan’s monetary base, now at -9.8%, shows that the Bank of Japan is tightening its monetary policy more quickly than expected. This hawkish approach could strengthen the Japanese Yen in the upcoming weeks. This shift in policy responds to ongoing inflation, which has consistently stayed above the 2% target for most of 2025. In November, the core Consumer Price Index (CPI) was at 2.7%. Last year, the Bank of Japan raised interest rates twice, ending the era of negative rates. Their commitment to this path now seems stronger than financial markets anticipated. For currency traders, this supports taking long positions in the Yen, especially against currencies where central banks are likely to hold or cut rates. In 2025, the USD/JPY exchange rate dropped from over 150 to around 138, reflecting this policy shift. This trend now seems set to continue.

    Effect on Stock and Currency Markets

    In equity derivatives, the rising Yen is a major challenge for the export-driven Nikkei 225 index. We should think about buying put options or setting up bearish call spreads to protect against or profit from potential losses in the index. In the last quarter of 2025, the market struggled to find direction as currency changes began to affect earnings forecasts. The Bank of Japan’s strict policy will likely increase volatility in both currency and equity markets. This presents an opportunity to buy volatility instruments, such as straddles on the Nikkei 225. This strategy could be profitable if the index moves significantly in either direction in response to the faster tightening schedule. Create your live VT Markets account and start trading now.

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