Japan’s Tertiary Industry Index fell by 0.5% month on month in December. The result was below the expected decline of 0.2%.
The index tracks output in the services sector. The data points to a weaker monthly performance than forecast.
Market Reaction And Growth Outlook
The December 2025 data showing a drop in Japan’s service sector was a negative surprise for the market. This report suggests that domestic economic momentum was already fading at the end of last year. These figures add weight to the view that Japan’s economy may struggle for traction in the first quarter of 2026.
This economic weakness makes it highly unlikely the Bank of Japan will consider tightening its monetary policy soon. Recent inflation data from January 2026 already showed a dip to 1.9%, falling back below the central bank’s target. Therefore, we should anticipate the Yen weakening further against the U.S. dollar, possibly testing the 158 level seen in late 2025.
For derivatives, this points toward buying USD/JPY call options or establishing long positions in futures contracts. A weaker Yen is also historically bullish for Japanese equities, as it boosts the overseas profits of major exporters. We could look at purchasing call options on the Nikkei 225 index, as the currency effect will likely outweigh concerns over the domestic slowdown.
The prospect of continued loose monetary policy also makes Japanese Government Bonds (JGBs) more attractive. We see an opportunity in going long JGB futures, as yields are likely to remain suppressed or fall further on signs of economic softness. The surprise in the data also increases uncertainty, so buying options to position for a rise in market volatility is a prudent hedge.
