Insights 
VT 
Japan’s exports decreased for the fourth consecutive month in August, affected heavily by higher U.S. tariffs on automakers and manufacturers. Exports to the U.S. dropped 13.8% year-on-year, marking the steepest decline since early 2021, with automobiles down 28.4% and chipmaking equipment plunging almost 39%. Some automakers have absorbed tariff costs by reducing export prices, while others are raising U.S. prices, passing costs onto consumers. There is a concern that combined with U.S. economic uncertainties, Japan’s output could be affected into the year-end.
Overall exports decreased by 0.1% year-on-year, a smaller decline than expected, while imports dropped 5.2% due to cheaper oil. The trade gap with the U.S. was at its smallest since early 2023, yet Japan experienced a broader ¥242.5 billion ($1.66 billion) deficit. After an agreement in July, Washington reduced baseline tariff rates on Japanese goods to 15%, providing some relief, although this is still well above the pre-trade-war norm of 2.5% on autos. Economists predict Japan’s economy may contract this quarter. The Bank of Japan Governor has promised caution on rate hikes due to external risks, as persistent export weakness poses downside risks for Japan’s economy.
Monetary Policy Concerns
Given that Japan’s exports are falling for the fourth consecutive month, we believe the Bank of Japan will remain hesitant to raise interest rates. The large interest rate difference between Japan and the United States will likely continue to weaken the yen. We have seen the USD/JPY pair test the 148 level this month, and we should consider buying call options on the pair to profit from further yen depreciation.
The sharp drop in shipments for automakers and chip-related companies suggests that Japanese corporate earnings will face headwinds. This directly impacts the Nikkei 225 index, where foreign investors have already been net sellers for three straight weeks, offloading over ¥800 billion in shares. We see an opportunity in buying put options on the Nikkei 225 or on specific auto-sector ETFs for the fourth quarter.
Economic Indicators and Market Opportunities
This environment reminds us of the period in 2022-2023, when a dovish BOJ and global economic pressures led to a sustained period of yen weakness. With the next BOJ policy meeting in early October, we expect implied volatility on yen currency pairs to rise from its current level of 9.5%. This could make strategies like long straddles attractive for those anticipating a major policy announcement.
Even with lower import costs from cheaper oil, the country is still running a trade deficit, which adds fundamental pressure on the currency. A structural deficit means more yen are being sold on the open market to pay for foreign goods. We must continue to watch global energy prices, as any rebound would worsen Japan’s trade balance and likely accelerate the yen’s decline.
