Japan\u2019s equity market has faced underperformance due to China’s export controls on goods with military benefits for Japan. Although crude oil prices have sharply declined, reducing Japan\u2019s energy import bill, the yen has shown limited response. President Trump announced that Venezuela will send 30-50 billion barrels of oil to the US, with revenues benefiting Venezuela but under US control. This reinforces expectations of Trump’s proactive stance on Venezuelan oil.<\/p>\n
Escalating China-Japan tensions gain attention, potentially influencing the BoJ\u2019s caution in rate changes. China\u2019s export control, including possible rare earths, poses risks, impacting Japan’s auto sector. An anti-dumping probe into Japan’s dichlorosilane exports further risks tensions. Such developments could strain bilateral relations further in coming weeks.<\/p>\n
Despite modest yield declines in the US, UK, and Germany, the super-long end of Japan\u2019s JGB curve faces downward pressure with a slight yield rise. Investor nerves are evident ahead of the 30-year JGB auction. Previous auctions post-Liberation Day were mixed, though December’s strong auction suggested yield attraction could boost demand.<\/p>\n
Persistent inflation, loose monetary policy, and increased spending create an unfavourable macro backdrop, with the yen likely to continue underperforming. Upcoming wage data could influence yen volatility, as wage growth supports the BoJ’s price stability objectives.<\/p>\n
Given the escalating tensions with China, we see downside risk for Japanese equities in the near term. The threat of export controls on rare earths is particularly concerning for Japan’s auto and tech sectors, as China currently processes nearly 90% of the global supply. Traders should consider buying put options on the Nikkei 225 to hedge against a potential downturn in the coming weeks.<\/p>\n
The yen is likely to remain weak against the dollar, currently trading near the 155 level. The potential for the Bank of Japan to delay another rate hike due to these geopolitical risks reinforces this view, echoing the policy caution we saw throughout much of 2025. We believe buying USD\/JPY call options offers a defined-risk way to position for further yen underperformance.<\/p>\n
In the bond market, we expect continued pressure on long-term Japanese Government Bonds (JGBs). With 30-year JGB yields hitting 2.15% yesterday, a level not seen in over a decade, the market is clearly nervous ahead of tomorrow’s auction. Shorting JGB futures could be a direct way to trade the view that sticky inflation and government spending will keep pushing long-term yields higher.<\/p>\n
Volatility is the key theme, especially with tonight’s wage data expected to show growth around 2.2%. While this is a slight moderation, it’s still firm enough to keep the BoJ on edge, potentially causing sharp moves in both the yen and JGBs. This environment suggests that option strategies designed to profit from a large price swing, regardless of direction, could be useful.<\/p>\n
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