The Bank of Japan (BOJ) Deputy Governor Himino stated Japan’s real interest rate remains low. He suggested that raising rates would be aligned with economic and price improvements, while recognising both upward and downward risks to growth and inflation forecasts.
Himino stressed the importance of evaluating baseline projections without assumptions. Factors such as the Japan-US trade agreement and US-China negotiations reduce uncertainty, yet global economic unpredictability persists. He highlighted that trade policy’s impact on Japan’s economy might not be significant.
Inflation and Corporate Profits
Corporate profits could face pressure from global slowdown and trade policy changes. Inflation is expected to stagnate initially but eventually reach 2%. Although it is nearing this target, it has not yet been achieved, with Himino noting ongoing risks and uncertainties.
Monetary adjustments should focus on short-term interest rates, rather than the volume of government bond purchases. To ensure market stability, a gradual decrease in the BOJ’s balance sheet is advised. There is a need to determine the right level of bond purchasing, with long-term rates determined by market forces.
Plans concerning BOJ’s ETF and J-REIT holdings will reflect past experiences. The yen weakened following Himino’s comments, suggesting anticipated rate hikes, but no immediate actions.
The Bank of Japan is signaling a very gradual and predictable path toward higher interest rates, which means we should not anticipate any sudden, aggressive moves. With the US Federal Reserve holding rates around 5.0% and the BOJ policy rate still at only 0.25% following the small hike in July 2025, the wide interest rate differential remains. This suggests that carry trades shorting the yen against the dollar could remain profitable in the near term.
Market Strategies and Outlook
We see an opportunity in the Japanese government bond (JGB) market, as the BOJ plans to reduce its bond purchases and allow the market to determine long-term rates. This points toward a potential steepening of the yield curve, where long-term yields rise faster than short-term ones. A bearish steepener, involving shorting long-dated JGB futures while holding short-dated ones, could be an effective strategy to capitalize on this shift.
For equity derivatives, the outlook is mixed, creating a case for cautious positioning on the Nikkei 225. The weak yen provides a tailwind for Japanese exporters, but the warning about corporate profits coming under pressure from a global slowdown is a significant headwind, especially after Q2 2025 GDP growth was revised down to just 0.1%. This tension suggests that buying protective puts or implementing collar strategies on the Nikkei could be prudent to guard against downside risk.
The latest core inflation data from August 2025, which came in at 1.9%, supports this cautious approach from the BOJ. Because inflation has still not sustainably hit the 2% target, the bank has justification to proceed slowly with any further rate adjustments. For traders, this means that options pricing should not reflect a high probability of a rate hike at the very next meeting.
Given the high degree of global uncertainty, particularly surrounding trade policy, hedging remains critical. The BOJ itself has highlighted the risk that the negative impact from trade disputes could be larger than anticipated. Therefore, we should consider maintaining long volatility positions or using derivatives that protect portfolios from unexpected downturns in the coming weeks.
