Bank of Japan Governor Kazuo Ueda announced that inflation in Japan is slowly rising and nearing the 2% target. Despite US tariffs, Japan’s economy remains strong. There has been no significant effect on capital spending, wages, or job trends. Therefore, Governor Ueda believes there’s no need to change the July outlook.

Assessing Tariff Impact

There is still uncertainty about how US trade policies will affect exchange rates. The Bank of Japan plans to carefully evaluate the impact of tariffs on the economy and how businesses react. We interpret Governor Ueda’s comments as an indication that the Bank of Japan will continue its gradual approach to policy changes. The latest core-core inflation data from August 2025, which showed 1.9%, supports his view that the 2% target is achievable, but not yet stable. This stability may lead to reduced volatility in front-end JGB futures for now. This suggests that another rate hike is more likely to happen late in the fourth quarter rather than unexpectedly in October. Following a slight increase to 0.25% earlier in 2025, overnight index swaps have not fully accounted for another hike, giving traders a chance to prepare for a December increase. The strong results from the 2025 spring wage talks, which resulted in an average 4.5% raise, provide the BOJ with the justification for future action.

Currency Market Implications

For currency traders, Ueda’s emphasis on uncertainty in the forex market is crucial, particularly with USD/JPY close to 158. His careful tone indicates the BOJ is unlikely to raise rates aggressively to protect the currency, leaving the yen at risk of weakening further. This opens the possibility for direct market intervention, similar to the actions taken in September and October 2022. With this in mind, buying out-of-the-money call options on USD/JPY could be an economical strategy to benefit from further increases. The main concern is a sudden intervention from the Ministry of Finance, as opposed to a change in BOJ policy. We believe Ueda’s focus on tariffs is more about preparing for potential risks than signaling an immediate policy change. The strength of the Japanese economy, as confirmed by recent Tankan surveys, means the BOJ will stay focused on domestic inflation data. The upcoming Tokyo CPI numbers will be critical for any signs of increasing price pressures. Until we see a clear and sustained rise above 2%, the BOJ is likely to remain patient. Create your live VT Markets account and start trading now.

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