Insights 
VT 
Japan’s imports increased by 3.3% year-on-year in September, surpassing the anticipated 0.6%. This indicates a divergence from market forecasts.
The surprise jump in September’s imports indicates Japan’s domestic demand is much stronger than we initially believed. This isn’t just a minor beat; it’s a significant signal that consumer and business activity may be accelerating. We need to reassess the narrative of a fragile Japanese economy.
Persistent Inflation and Monetary Policy
This strength is happening alongside persistent inflation, which makes the Bank of Japan’s position more difficult. For example, the national core CPI released last week for September came in at 2.9%, stubbornly remaining above the 2% target for several consecutive months. This combination of strong import demand and high inflation increases the probability of a hawkish policy shift.
For currency traders, this strengthens the case for a stronger yen. With the USD/JPY exchange rate still elevated around the 155 mark, a level reminiscent of the volatility seen back in 2024, the pressure on policymakers is mounting. We should be looking at call options on the JPY or put options on USD/JPY, anticipating either central bank action or verbal intervention in the weeks ahead.
This also has direct implications for interest rate derivatives, as the justification for maintaining negative interest rates is weakening. We have seen Japanese Government Bond yields slowly creeping up, with the 10-year JGB now yielding over 1.1%, its highest level since 2013. The import data may push traders to price in a policy rate hike sooner than previously expected, possibly before the end of the year.
Equity Market Caution
From an equity perspective, this outlook warrants caution. A potential interest rate hike would increase borrowing costs for corporations and could put a brake on the Nikkei 225’s rally. We should consider buying protective puts on the index to hedge against a potential downturn driven by a shift in monetary policy.
