Ueda highlights the benefits of the US-Japan trade deal as Japan’s economy shows moderate recovery amid uncertainties
by VT Markets
/
Jul 31, 2025
Japan’s economy is slowly improving but still faces challenges. Easy monetary policies should help, and while inflation may pause, it is expected to rise gradually.
The impact of trade changes on prices and international economies is uncertain. We need to pay close attention to how trade policies influence financial markets and Japan’s economic future.
US-Japan Trade Deal Progress
The US-Japan trade deal represents progress and reduces uncertainty about the economic forecast. This suggests there may be future interest rate hikes, although the Bank of Japan is unlikely to commit to this immediately.
Recent comments show a shift in the Bank of Japan’s thinking. Revised inflation forecasts indicate they may raise rates sooner than expected, signaling a move away from the very easy policies of the post-pandemic period.
Data supports this shift. The national core-core CPI for June 2025 was 2.3%, staying above the 2% target for the fourth month in a row. This ongoing price pressure, along with average wage increases of 4.5% from spring Shunto negotiations, gives the Bank of Japan a solid reason to take action.
Implications for Currency and Bond Markets
For traders, this points to a stronger yen in the coming weeks. After the USD/JPY rate approached 170 earlier this year, these new comments could lead to a significant reversal. It’s wise to prepare for a move back toward the 160-162 range using options or futures.
We must keep a close eye on the Japanese Government Bond market. Since the end of Yield Curve Control in early 2024, the 10-year JGB yield has risen to about 1.1%. Another rate hike could push this closer to 1.25%, opening up opportunities in interest rate swaps and bond futures.
The new US-Japan trade agreement is a key factor in this situation. By lowering tariffs and reducing economic uncertainty, it removes a major reason the Bank of Japan has had for not acting over the past year. This makes a policy change more likely than at any time since the last small hike.
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by VT Markets
Jul 31, 2025
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