Implications for Monetary Policy and the Yen
The stronger-than-expected bank lending data for May points to continued strength in Japan’s domestic economy. This adds to the evidence that inflationary pressures are building, putting the Bank of Japan in a difficult position. We see this as increasing the probability of a more hawkish policy signal at the BoJ’s meeting later this month. This development strengthens the case for a stronger yen, which has been under pressure for much of the past year. With USD/JPY currently trading around 168, we believe this data could be a catalyst for a reversal. We are considering buying JPY call options to position for a potential move back towards the 160 level in the coming weeks. The lending growth, combined with core inflation that has stayed above the 2% target for over a year, makes a future interest rate hike more likely. Recent data shows Japan’s core CPI for April came in at 2.8%, well above the official target. Therefore, we will look to enter interest rate swap positions that will benefit from a rise in Japanese short-term yields.Impact on Equity Markets
For equity markets, this news presents a mixed picture, as rate hike fears could outweigh optimism about economic growth. The Nikkei 225 has stalled near the 42,000 mark, showing investor indecision. We view this as a reason to be cautious and will look to buy protective puts on the index to hedge our long positions against a potential downturn.Start trading now — click here to create your real VT Markets account.
