Tariff uncertainty and the upcoming Tankan survey could affect yen stability, but the possibility of a Bank of Japan (BOJ) rate hike this year supports the Japanese currency. BOJ board member Junko Nakagawa warned about the risks linked to U.S. tariff policies and highlighted the importance of the Tankan survey in measuring corporate sentiment amid trade tensions.

BOJ’s Data-Driven Approach

Nakagawa stressed that the BOJ is focused on data and will adjust monetary policy when necessary. With experience leading Nomura Asset Management, she takes a balanced view on policy. Last year, the BOJ ended its extensive stimulus program and raised rates to 0.5% in January, targeting a 2% inflation rate. In July, the bank kept its position but raised its inflation forecasts and expressed optimism about growth, maintaining expectations for another rate hike this year. Many analysts expect at least a 0.25% rate increase before the year ends. This expectation has grown since July. Nakagawa noted there is still significant uncertainty regarding how tariffs will impact the economy. Currently, the yen is experiencing a back-and-forth battle. Expectations for another BOJ rate hike provide some support, but the threat of U.S. tariffs, especially on the auto sector, limits the yen’s potential strength. This creates a cautious environment for derivative trading in the weeks ahead.

Tankan Survey and Yen Outlook

All attention is on the upcoming Q3 Tankan survey, which is essential for measuring business confidence. In the past, a surprisingly weak Tankan survey in the first quarter of 2024 delayed the BOJ’s initial efforts to normalize policy. If we see a similar weak reading now, it could significantly push back the next expected rate hike, leading to a sharp sell-off in the yen. This scenario makes long-dated JPY put options a potentially useful hedge. Given this uncertainty, the implied volatility on USD/JPY options has been rising, recently reaching levels reminiscent of the policy shift in January 2025. Traders might find it wiser to adopt strategies that benefit from price fluctuations rather than betting on a specific direction. Long straddles or strangles could capture a breakout if the tariff news or Tankan survey surprises the market. The BOJ’s data-driven approach means the next inflation report is also critical. Last month’s core CPI was 2.1%, slightly above the BOJ’s 2% target. However, if it drops below that level, it could reinforce a negative Tankan signal. This would likely delay a rate hike until 2026, causing a significant re-evaluation of JPY interest rate swaps. Create your live VT Markets account and start trading now.

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