The Bank of Japan (BOJ) is carefully looking to return to normal policies, hinting at possible interest rate increases if economic and inflation forecasts are met. Although current underlying inflation is below the target, the BOJ expects it to rise gradually due to increased spending, higher wages, and better inflation expectations. The BOJ emphasizes that it will adapt its policies based on incoming data, as interest rates are still historically low. It also notes risks from uncertain global trade policies, the persistent impact of higher food prices, and weak export and production trends. While fiscal growth in the US and Europe could boost global demand, trade protectionism may slow it down.

Outlook and Timelines

Overall, the BOJ is not rushing to tighten its policies but is getting ready for possible rate increases by late 2025 or early 2026, depending on stable economic conditions and achieving inflation targets. The BOJ’s cautious stance indicates that the yen carry trade will likely be appealing for the next few months. We see little chance of an interest rate increase before the year ends, creating a good opportunity for traders. With the U.S. Federal Reserve keeping its policy rate near 4.75%, the significant interest rate gap favors betting against the yen in favor of the dollar. We need to monitor the data closely, just as the central bank does. The recent June 2025 numbers revealed core inflation at 1.8%, still below the 2% target, supporting a wait-and-see approach. Spring 2025 wage negotiations resulted in a solid 3.9% average raise, but this hasn’t yet fully led to the sustained inflation the BOJ wants to see.

Market Implications and Strategies

This outlook suggests that implied volatility for the yen is likely to remain low in the short term but will increase as we approach late 2025. Traders should think about buying longer-dated options on USD/JPY, especially options that expire in early 2026, to prepare for a potential policy change at a relatively low cost now. Looking back at the policy changes in late 2023 and 2024, we noticed that volatility surged in the weeks before the Bank made its moves, a trend we anticipate will continue. The mentioned risks from global trade and weak exports are crucial for strategy. Any sudden downturn in the global economy, especially in China or the U.S., could push back the BOJ’s timeline even more and boost the yen as a safe-haven currency. This reinforces the strategy of using options, as they provide limited risk while still allowing exposure to a potential rate hike. Create your live VT Markets account and start trading now.

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