Japan\u2019s housing starts rose 33.9% year on year in May, beating the market consensus of 31.8%. The outturn points to faster residential construction activity than analysts had pencilled in for the month.<\/p>\n
The difference between actual growth and expectations was 2.1 percentage points. The release refers to the year-on-year measure for May housing starts in Japan.<\/p>\n
The surprisingly strong housing starts data for May points to a robust domestic economy. We see this as increasing the pressure on the Bank of Japan to reconsider its ultra-loose monetary policy sooner than anticipated. This development suggests a potential shift in the central bank’s stance in the coming weeks.<\/p>\n
Consequently, we are positioning for a stronger yen, anticipating a move lower in USD\/JPY. With Japan’s core CPI recently reported at 2.8% for May, stubbornly above the 2% target, the case for a rate hike is building. We are considering buying JPY calls or put options on USD\/JPY with expirations after the late July BoJ meeting.<\/p>\n
For Japanese equities like the Nikkei 225, the path forward is less clear, creating opportunities in volatility. While a strong economy supports corporate earnings, the prospect of higher interest rates could cap gains. We believe options strategies like straddles on Nikkei futures are appropriate to trade the expected increase in price swings.<\/p>\n
We are also looking at Japanese Government Bonds, where we expect yields to continue their upward trend. Historically, periods of strong domestic data have tested the Bank of Japan’s yield curve control policy, and we expect this time to be no different. Shorting JGB futures is a direct way to position for this, as the market will likely price in a policy shift.<\/p>\n\n\n\n