Bank of Japan board member Nakagawa has raised concerns about the uncertainty over tariffs’ impact. If economic activity and price outlooks align, the BOJ may increase policy interest rates.
The future of trade policies remains uncertain, potentially affecting business and household sentiments globally, which could impact Japan and other economies. The results of the September Tankan survey are essential for assessing trade policy changes.
Impact on Wage Price Dynamics
Firms focusing on cost-cutting might weaken the transfer of cost increases to selling prices, affecting wage-price dynamics. Japan’s economy has shown moderate recovery, though weaknesses persist.
High uncertainties about economic activity and price outlooks prevail, with watchful attention on firms’ behaviour shifting towards raising wages and prices. The Tankan survey is a crucial tool by the BOJ to measure Japanese firms’ economic health.
Covering around 10,000 companies, it includes business conditions, investment plans, and employment data. The survey informs policy decisions and is a key economic indicator, released after the quarter it covers. The September 2025 Tankan report is expected to release at the end of September or early October 2025.
Global Trade Policies
The Bank of Japan is signaling it could raise interest rates, but high uncertainty around global trade policies is making it hesitate. We see this creating a holding pattern in the USD/JPY, coiled for a potentially sharp move in the next month. Traders should therefore focus on strategies that profit from a significant price swing rather than a specific direction.
Given this uncertainty, buying volatility appears to be the most prudent strategy leading into late September. Using options, traders could consider straddles or strangles on the Yen, which would profit from a large move in either direction following the Tankan survey results. This approach capitalizes on the market’s current indecision without betting on a specific outcome.
The case for a stronger Yen and a BOJ rate hike is supported by the strong wage growth we saw earlier in the year. The spring 2025 “shunto” wage negotiations resulted in an average pay increase of 5.1%, the highest in over three decades. This data supports the view that upward pressure on wages could finally translate into sustainable inflation.
However, there are signs of weakness that could keep the BOJ on hold, pushing the Yen weaker. The most recent core Consumer Price Index reading for July 2025 came in at 2.4%, which, while above target, showed a slight deceleration from previous months. This aligns with the previous June 2025 Tankan survey, where the diffusion index for large manufacturers fell from +11 to +9, hinting at wavering business confidence.
As we approach the Tankan release around September 30, we can expect implied volatility on Yen options to increase. This means positioning for a breakout in these coming weeks, while volatility is relatively lower, could be more cost-effective. The market is waiting for this key data point to break the deadlock.
This sentiment will also directly impact the Nikkei 225. A surprisingly weak Tankan report would likely hurt business investment and stock prices, making protective put options on the index a valuable hedge. Conversely, a strong report could trigger a rally, but the primary focus for now remains the currency markets.
