The President of the European Council, António Costa, and the President of the European Commission, Ursula von der Leyen, met with Japanese Prime Minister Shigeru Ishiba in Tokyo during the 30th EU-Japan Summit. Their discussion focused on improving cooperation to address unfair trade practices. This meeting is timely as trade relations between Japan and the US continue to be crucial for the Bank of Japan’s policies.

Positive Steps for Japan

While the EU-Japan talks may not significantly impact the markets, they reflect positive strides in Japan’s international relations. Domestic politics could also increase fiscal support in Japan. We see the summit as a small but positive development, highlighting Japan’s steady integration into global trade. Although it’s not a major market driver, it supports a positive outlook for Japanese assets. This sentiment is evident in the Nikkei 225, which recently surpassed 34-year highs, indicating strong investor confidence. Traders are more focused on the Bank of Japan and the yen. Recent data shows Japan’s core inflation has stayed above the central bank’s 2% target for over a year, with the latest figures around 2.3%. This ongoing inflation raises expectations that negative interest rates may soon come to an end.

Market Impact on the Yen

Typically, when a central bank shifts to a tightening policy, the currency appreciates. Therefore, we suggest that traders should prepare for a stronger yen in the upcoming weeks and months. This could mean buying call options on the yen or put options on the USD/JPY currency pair. A key event to monitor will be the “shunto” spring wage negotiations. If wage growth surpasses last year’s 3.8%, the central bank may have strong reason to raise interest rates. A favorable outcome from these negotiations could cause a rapid movement in the currency. Given this outlook, a smart strategy is to protect long Japanese equity positions against a rising yen. One approach could be to remain long on Nikkei 225 futures while purchasing out-of-the-money puts on USD/JPY. This way, you can keep benefiting from the equity rally while hedging against the currency risk associated with the policy shift. Create your live VT Markets account and start trading now.

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