Insights 
VT 
Japan’s monetary base decreased year-on-year from -7.8% to -8.5% in November. This decrease reflects changes in the country’s financial settings.
The monetary base encompasses currency supplied by the central bank. It includes coins, banknotes, and deposits held by commercial banks in the central bank.
Impact On Lending And Economic Activity
A decline in the monetary base can influence lending and overall economic activity. Changes in this metric are closely monitored for insights into the economy’s direction.
This information on Japan’s monetary base is a key factor in analysing the country’s financial environment. Monitoring such changes can provide context for future economic decisions.
We are seeing the Bank of Japan’s balance sheet reduction pick up speed. The year-over-year monetary base has dropped further to -8.5%, showing an acceleration in their quantitative tightening. This signals a more determined move away from the ultra-loose policies that defined the Japanese economy for over a decade.
Market Implications
This continued tightening strongly suggests a stronger yen is on the horizon. We expect downside pressure on currency pairs like USD/JPY, which, looking back from our current perspective in late 2025, had seen significant highs above 155 back in 2024. Derivative traders should consider positioning for this by looking at put options on USD/JPY or call options on the yen itself.
For equity markets, this withdrawal of liquidity is a headwind for the Nikkei 225. After the index broke records and touched above 40,000 in early 2024, we see a higher probability of a correction, especially as recent data shows a 2% downward revision in Q1 2026 corporate earnings forecasts. Protective put options or short futures positions on the index are strategies to consider in the coming weeks.
We anticipate further upward pressure on Japanese Government Bond yields. Since the formal end of Yield Curve Control in 2024, the 10-year JGB yield has already climbed to over 1.2%, a level not seen in more than a decade. Traders can position for this trend to continue by using interest rate swaps or shorting JGB futures.
