Insights 
VT 
Japan’s preliminary GDP for Q2 showed a +0.3% quarter-on-quarter growth, exceeding the expected +0.1%. This marks the fifth consecutive quarter of GDP increase for the country.
A stronger GDP influences the Bank of Japan’s stance, possibly leading to higher yields and a stronger yen. Consequently, the yen gained value, with USD/JPY moving from early highs above 147.80 to around 147.60.
Stronger GDP’s Impact
The stronger GDP print of +0.3% for the second quarter gives the Bank of Japan more reason to continue normalizing policy. This fifth consecutive quarter of growth strengthens the case for moving away from an ultra-easy stance. We believe the market will now price in a higher probability of another rate hike before year-end.
This data builds on an already compelling inflation picture. With the latest nationwide core CPI for July registering 2.1%, inflation has now remained above the BoJ’s 2% target for much of the past two years. This sustained pressure, combined with solid economic growth, makes it difficult for the central bank to delay further action.
For derivative traders, this signals an opportunity to position for a stronger yen. We are reminded of the BoJ’s historic pivot away from negative rates back in March of 2024, which showed they are willing to act. After seeing USD/JPY trade as high as 160 last year, a significant downward correction is possible if the popular carry trade begins to unwind.
Currency Volatility Ahead
In the coming weeks, we anticipate increased currency volatility heading into the September BoJ meeting. Traders should consider buying USD/JPY put options or establishing put spreads to position for a move lower with defined risk. The break below 148.00 is a key technical signal, and we will be watching for a potential test of the 145 level.
