Tokyo’s Consumer Price Index (CPI) for August 2025 rose by 2.6% compared to last year. This result met expectations but was lower than July’s increase of 2.9%. When we exclude fresh food, the CPI grew by 2.5% year-on-year, also matching forecasts but down from the 2.9% seen before. Excluding fresh food and energy—considered the core inflation—the CPI hit 3.1% annually. This is the highest level since January 2024. Consumer inflation has been above the Bank of Japan’s 2% target for over three years, along with steady increases in nominal wages.

Bank Of Japan Interest Rate Decisions

In January, the Bank of Japan (BOJ) raised short-term interest rates to 0.5%. Governor Kazuo Ueda has advised caution with further rate hikes, fearing economic downturns due to US tariffs. BOJ board member Nakagawa stressed the need for data-driven decisions, especially with the Tankan report expected in early October. Other economic signs showed Japan’s industrial output declined by 1.6% month-on-month in July, while retail sales grew by 0.3% year-on-year. The unemployment rate fell to 2.3%. In the US, interest rate cuts may be on the way, with Stephen Miran’s hearing set for September 4. The Bank of Japan and the US Federal Reserve appear to be on opposite paths. The Fed is considering interest rate cuts, while rising inflation in Japan pressures the BOJ to possibly raise rates again. This growing split in monetary policy is a key focus for trading in the coming weeks.

Monetary Policy Divergence

Inflation in Japan remains persistently above the BOJ’s 2% target, especially the core measure, which sits at 3.1%. Consumer prices have exceeded the target for over three years, prompting the January 2025 rate increase to 0.5%. Another hike seems likely before year-end. However, weak industrial output and retail sales show some economic weakness. BOJ members stress their decisions will rely on data, particularly the upcoming Tankan business survey expected around October 1st. A surprisingly poor Tankan result could delay the next rate hike. In contrast, the US is sending a clear message with Fed officials indicating it’s time to lower rates. This shift is supported by a steady decline in US core PCE inflation, which is now around 2.4%, close to the Fed’s target. Markets are confidently forecasting at least two rate cuts from the Fed by early next year. This policy divide suggests a weaker US dollar against the Japanese yen. We should plan for a lower USD/JPY exchange rate, using tools like options to manage risks around major data releases. Purchasing JPY calls or USD puts can help us profit from a strengthening yen while limiting downside risk. This outlook also applies to interest rate markets, where US and Japanese bond yields likely will converge. Falling US Treasury yields combined with rising Japanese Government Bond yields present trading opportunities. We can utilize interest rate futures to capitalize on this trend. Create your live VT Markets account and start trading now.

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