The Bank of Japan is expected to keep its interest rates at 0.5% during the policy meeting on September 18-19. This would be the fifth time in a row that the rate remains unchanged since it increased back in January. Board members generally feel that raising rates now would be too early, and the market agrees. They are closely monitoring the impact of recent U.S. tariffs, especially on industries like automotive exports, and how these tariffs might affect wages and investment in Japan.

Market Expectations

There aren’t likely to be any market surprises, and the yen is expected to stay stable unless new tariff-related risks emerge. Japanese stocks, especially those of exporters, may trade cautiously as the automotive sector reassesses its outlook. The Bank of Japan’s steady policy supports different trends compared to the Federal Reserve, which keeps global yield spreads in the spotlight. The upcoming Bank of Japan meeting is viewed as an uneventful occasion, so now might be a good time to adopt strategies that benefit from low volatility, such as selling strangles on USD/JPY options. This week, implied volatility for one-month options has dropped to 7.2%, indicating that the market expects little change. While this setup profits from stability, we need to stay alert for any comments on tariff risks that could lead to unexpected movements. We also see a chance to protect against potential declines in Japanese stocks by purchasing put options on the Nikkei 225 index. This perspective is supported by recent trade data from August 2025, showing a 1.5% decline in auto exports to the U.S. Key exporters may soon have to update their yearly forecasts, which could heavily affect the index in the coming weeks.

Macro Play

The difference in policies between the BOJ and the U.S. Federal Reserve is the most significant macro trend currently. With the U.S. Fed funds rate steady at 4.75%, the yield gap between the two countries continues to favor the yen carry trade. This strategy of borrowing in yen to invest in higher-yielding U.S. assets has been steadily profitable, similar to trends seen from 2022 to 2024. Looking back, the BOJ’s decision to maintain its policy rate is a familiar one, reminiscent of the long periods of stability following the introduction of negative interest rates in 2016. However, there is now a clear focus on U.S. tariffs as a major risk, marking a shift from earlier in the year. Therefore, while a rate hold is expected, the reasoning behind it may be becoming more cautious. Create your live VT Markets account and start trading now.

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