Naoki Tamura, a member of the Bank of Japan (BoJ), has proposed that the central bank should set interest rates to neutral levels. Japan’s economy is expected to grow, supported by a moderate increase in global economic activity. There is no need for a drastic rate hike or stricter monetary policy since there are both risks of inflation rising and falling. If inflation exceeds expectations, the BoJ may need to adjust rates to avoid drastic increases in the future.

Rising Inflation Risks

Inflation risks are increasing in Japan, with many companies sticking to their investment plans. It’s important to keep a close eye on rising food prices. Currently, Japan’s real interest rate is negative, with domestic price trends possibly rising by July 2025. The Japanese Yen (JPY) is affected by several factors, including BoJ policies, the difference in bond yields between Japan and the US, and overall market risk sentiment. The Yen typically strengthens as a safe-haven asset during uncertain times. Recent adjustments in the BoJ’s ultra-loose policy have bolstered the Yen, partly due to interest rate cuts from other major central banks. These remarks from a BoJ board member indicate a clear trend towards higher interest rates, reinforcing the hawkish attitude we’ve seen this year. The recent drop in USD/JPY to 150.60 shows the market is responding seriously. For derivative traders, this suggests that the time of a consistently weak yen may be coming to an end, prompting a need for strategic changes. The supporting data backs up this view, making the case for future rate hikes more credible. The nationwide Core CPI for September 2025 was reported at 2.3%, remaining above the BoJ’s 2% target for the eighteenth consecutive month. This ongoing inflation supports hawkish members like Tamura in advocating for further policy normalization.

Wage Growth and Interest Rates

Additionally, this inflation is being fueled by strong wage growth, which the BoJ has been anticipating. The spring 2025 “shunto” wage negotiations resulted in an average pay increase of 4.5%, the highest in over thirty years. This significant shift means we should now anticipate a greater likelihood of rate hikes at upcoming BoJ meetings. For our strategies, we should prepare for greater volatility in yen-related pairs. The one-month implied volatility on USD/JPY options, which has been around 8%, is likely to rise as the market braces for the BoJ’s next move. We should think about buying options to position for larger price moves, rather than just selling them for premiums. The interest rate gap that has contributed to the yen’s weakness is clearly narrowing. The US 10-year Treasury yield has fallen to 3.8% as the Federal Reserve changes its course, while the yield on the 10-year Japanese Government Bond has risen to 0.95% due to hopes of policy normalization. This shrinking gap will keep putting downward pressure on the USD/JPY pair. Given this outlook, we should prepare for further yen strength in the upcoming weeks. Strategies like buying JPY call options or USD/JPY put options provide a way to profit from a potential move towards 148 or lower with defined risk. Timing these entries around key data releases and before the next BoJ policy meeting will be crucial. Create your live VT Markets account and start trading now.

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