Japan’s money supply M2+CD year-on-year increased by 1.7% in December. This is a slight decrease from the previous rate of 1.8%.
M2+CD includes cash, checking deposits, and savings deposits. It is an indicator of the economy’s liquidity and monetary conditions.
Money Availability And Economic Impact
The rate reflects the amount of money available in the economy for spending and saving. Changes in M2+CD can affect inflation and economic growth.
The decrease from the previous month suggests a minor shift in money availability. This data is monitored as it can inform economic policy and financial stability within the country.
We’re seeing Japan’s money supply growth slow to 1.7% in December 2025, a slight dip from the previous month. This reinforces the view that the Bank of Japan (BoJ) has little reason to tighten its policy soon. This continued sluggishness in money growth points towards a persistent, low-inflation environment.
Impact On Currency And Investment Strategies
The slowing money supply suggests the interest rate gap between the US and Japan will remain wide, putting downward pressure on the yen. We should consider buying USD/JPY call options or going long futures, targeting levels above the recent highs seen in late 2025. Last year, the USD/JPY pair gained over 12% as the Federal Reserve held rates steady while the BoJ remained accommodative, a trend we expect to persist.
A weaker yen directly benefits Japan’s large exporters, which should boost the Nikkei 225 index. We are looking at out-of-the-money call options on the Nikkei 225 as a cost-effective way to play this potential upside. This strategy proved effective in the second half of 2025 when the index rallied nearly 8% on similar currency tailwinds.
With the BoJ unlikely to raise rates, Japanese Government Bond (JGB) yields should remain anchored. This makes long positions in JGB futures a relatively stable trade for the coming weeks. We can use this to hedge against any unexpected risk-off sentiment that might temporarily strengthen the yen.
The market’s expectation of a passive BoJ has kept implied volatility on currency pairs like USD/JPY relatively low, with recent readings from the Cboe Japan Exchange showing a decline to multi-month lows. While this data suggests a continued calm, we should watch for any change in tone from BoJ officials. Any hint of a policy review could cause a sharp spike in volatility, making long vega positions a potential, albeit contrarian, hedge.
