Insights 
VT 
Japan has roughly achieved the Bank of Japan’s (BoJ) price target. Headline inflation surpassed 2%, and conditions hint at broader inflation.
Expectations point to moderate growth in Japan’s consumption. The Tankan report shows tariffs haven’t greatly slowed Japan’s economy.
Market Volatility Concerns
Market volatility concerns from US tariffs are easing. The US economy avoided a downturn, and the yen is weakening.
BoJ must shift its monetary policy in stages. As of writing, USD/JPY is trading 0.11% higher at 150.75.
The BoJ is Japan’s central bank, targeting inflation around 2%. They embarked on ultra-loose monetary policy in 2013, including Quantitative and Qualitative Easing.
In 2016, the BoJ introduced negative interest rates and controlled the 10-year government bond yield. In March 2024, they raised interest rates.
The BoJ’s stimulus led to yen depreciation. This trend reversed slightly in 2024 when BoJ left its ultra-loose stance.
Policy Unwinding
The BoJ started policy unwinding due to rising inflation and potential salary increases. The weaker yen and global energy prices contributed to rising Japanese inflation.
A senior Bank of Japan official is signaling that their inflation goal has been substantially met, suggesting we should prepare for further monetary policy tightening. This indicates the multi-stage “shift” away from the ultra-loose policy that began in 2024 is set to continue. We must now seriously consider the prospect of additional interest rate hikes in the near future.
This view is supported by recent data showing Japan’s core inflation has remained above the 2% target for over a year, with the September 2025 reading at 2.5%. Furthermore, this year’s spring wage negotiations secured an average pay increase of over 4%, providing a solid foundation for consumer spending and second-round inflation effects. These are the exact conditions the central bank was waiting for to justify further normalization.
For traders, this outlook implies a stronger yen, as the interest rate difference between Japan and other major economies like the US is poised to shrink. With USD/JPY trading near the 151 level, we should be positioned for potential downward pressure on the pair. Options strategies that benefit from a falling USD/JPY, such as buying put options, may become increasingly attractive.
The warning to expect a gradual, multi-stage process suggests that the timing of future moves is uncertain, which will likely fuel currency volatility. This environment is ideal for traders using options to bet on price swings, as implied volatility on yen pairs is expected to climb ahead of upcoming BoJ meetings. We should anticipate larger than usual price movements around these policy announcements.
Looking back, the initial rate hike in March 2024 was a historic pivot after nearly two decades, and the bank has acted cautiously since. However, with the US economy having avoided a major downturn and fears of external shocks diminishing, the BoJ now has a clearer runway. The conditions for them to continue raising rates are much more favorable today than they were a year ago.
