The Bank of Japan (BoJ) might have a more positive view on the effects of US tariffs in its upcoming report, even though some uncertainty remains. Interest rates are expected to stay the same during the meeting on July 30-31. The BoJ is likely to believe that inflation will hit its 2% target in the latter half of its three-year forecast. They might also raise the inflation estimate for this fiscal year, hinting at a more aggressive approach.

US-Japan Trade Negotiations

US-Japan trade talks have played a role in the BoJ’s decision-making, delaying possible interest rate increases. Winning the upper-house election could strengthen the Japanese yen if the ruling party keeps its majority. As inflation remains high and economic data looks strong, there could be rising expectations for a trade agreement and an earlier rate hike. According to Dellamotta’s report, the central bank seems to be changing its tone. A more upbeat outlook on US tariffs indicates a possible hawkish trend ahead. Derivative traders should prepare for the yen to gain value. There’s a significant chance of raising the inflation forecast, especially since Japan’s core inflation reached 2.5% in June, staying above the 2% target for over a year. Recognizing this ongoing inflation would signal future rate hikes and strengthen the argument for yen appreciation.

Market’s Potential Reaction

The upcoming upper-house election could be a major political factor in this change. If polls are correct and the ruling party retains its majority, it could speed up trade discussions and give policymakers the assurance they need to take action. We expect the market to start factoring in a rate hike more actively after the election. Looking at history helps us understand the market’s possible response. In the past, even minor hawkish surprises from the central bank have caused the yen to soar, as seen with adjustments to yield curve control in late 2022. The current situation might lead to a similar quick movement in the currency. Given this outlook, buying yen call options against the U.S. dollar seems appealing. The implied volatility for these options is relatively low leading up to the events. This creates a chance to benefit with defined risk before the BoJ’s July meeting. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now