The Bank of Japan’s Deputy Governor Uchida stated that interest rates will increase if the economy and prices improve as expected. There is substantial uncertainty surrounding trade policies globally.

Japan’s underlying inflation is predicted to pick up pace again following a slowdown in growth. Uchida is aware that recent price increases are adversely affecting consumption.

Japan’s Central Bank Perspective

What Uchida is pointing out here isn’t just a matter of routine policy guidance—it’s a clear message about how Japan’s central bank is thinking about its next steps. When he says rates will rise if economic and price trends unfold as they expect, it implies not only a conditional approach but a willingness to shift gears reasonably soon. And this is not mere speculation. Policymakers appear to be signalling a move away from ultra-loose monetary settings for the first time in several decades, and that prospect has direct implications we need to address now.

Price growth in Japan briefly lost momentum earlier this year, partly due to energy subsidies and slowing global demand, but the suggestion is that this soft patch has already started to pass. The forecast for inflation re-accelerating points to renewed cost pressures, likely underpinned by wage increases from this year’s Shunto negotiations and continued tightness in domestic labour markets. That means we’re now in a space where the Bank can reasonably justify a moderate increase in rates, provided there is no stall in consumer spending or exports over the next quarter.

Uchida’s comment about consumption hurting from higher prices adds a layer of complexity—domestic demand might be more sensitive than previously assumed, and the recovery in household spending could be uneven. However, this tension between inflation resuming and households turning cautious isn’t unusual at this stage in the cycle. The bank doesn’t seem ready to overreact, but they’re also not looking to sit on their hands.

Globally, trade policy uncertainty remains high, and for those of us paying close attention to cross-border fund flows, this matters. With disputes and tariffs in play across several large economies, global supply chains are still adjusting. This could introduce fresh volatility in export-dependent sectors and by extension in yen-based valuations—even more so if other central banks shift faster than Tokyo. It’s the kind of friction that may skew short-term sentiment, particularly around resource pricing and exchange rate pairs.

Market Positioning Strategies

In the next several weeks, it would be rational to focus on positioning ahead of potential policy adjustment, rather than waiting until it’s fully priced in. The market often doesn’t give much warning when themes change, which makes relative rate expectations highly relevant again—especially in a low-volatility setting. When inflation shocks are mild and predictable, implied vol often underappreciates rate path changes. That dislocation can’t last forever.

We’ve been watching the term structure flatten as traders digest these signals, hinting that any shift from the Bank may come at a slower pace compared to peers. There’s nothing at the moment suggesting a rapid series of hikes—what’s more likely is a cautious, incremental pattern, provided macro conditions don’t slip.

What this ultimately leaves on the table is an opportunity to reprice forward interest rate contracts with a degree of directional conviction. Spread trades tied to relative tightening cycles can be revisited, with adjusted assumptions on local consumption fragility and core inflation momentum.

Create your live VT Markets account and start trading now.