MUFG expects the Bank of Japan to keep the short-term interest rate at 0.50% in this week’s meeting. They believe the next rate hike will happen in January 2026. This forecast is shaped by uncertainty around U.S. tariffs and a gloomy growth outlook. Analysts think Governor Kazuo Ueda needs more time to assess how these tariffs will affect Japan before making any rate changes. People are eager for possible hints about policy shifts during Ueda’s press conference, but MUFG does not foresee major updates in October.

Domestic Data and BoJ Outlook

MUFG’s forecast is influenced by unclear domestic data, political factors, and how U.S. trade policy might impact Japan’s economy. The BoJ’s Outlook Report indicates a slowdown in growth, with risks to corporate profits as global economies weaken. Cushioned financial conditions are expected to help ease this slowdown, with growth likely to pick up again. Inflation is anticipated to drop, with the Consumer Price Index (CPI) expected to fall to 2.5–3.0% in fiscal 2025, moving closer to 2% by 2027. MUFG notes that the current official projections and recognized growth risks indicate no rate increases for the rest of this year. Potential market impacts include continued yen weakness due to the delayed rate hikes, limiting yields in the rates market, supporting equity sentiment, and increasing vulnerability in sectors connected to trade.

Japanese Yen and Market Implications

With the expectation that the Bank of Japan will keep its rate at 0.50% this week, we believe the Japanese yen will continue to weaken. The postponed rate hike until January 2026 creates a larger gap in policy compared to other central banks. With the USD/JPY exchange rate already above 158, purchasing call options on the pair to aim for a move toward 160 seems like a smart strategy for the coming weeks. The outlook for Japanese Government Bonds suggests low volatility ahead, as a long pause in policy should keep yields stable. After the market’s turbulence when the BOJ ended its Yield Curve Control in late 2024, investors now expect stability until the New Year. This situation is favorable for traders looking to sell volatility on JGB futures through strategies like short straddles or strangles. For equity markets, the supportive stance is a positive but is held back by a weak growth perspective. The Nikkei 225 has struggled to stay above the 42,000 mark, especially following the revised Q2 2025 GDP growth of only 0.1% annualized. We believe selling out-of-the-money call options or using covered call strategies is a wise way to generate income while recognizing a potential cap on market gains. Uncertainty surrounding U.S. tariffs particularly affects Japan’s trade-sensitive sectors. Recent data from August 2025 indicated a slight drop in export orders, raising concerns for major automakers and electronics companies. This suggests that traders might consider buying put options on certain export-oriented stocks as a hedge or a way to bet against those most at risk from trade disputes. Create your live VT Markets account and start trading now.

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