Insights 
VT 
In July 2025, Japan’s industrial production experienced a month-on-month decline of 1.6%, which exceeded market expectations of a 1.0% decrease. This downturn followed a prior increase of 2.1% the previous month. On a year-on-year basis, industrial production fell by 0.9%, compared to an anticipated drop of 0.6% and a previous rise of 4.4%.
Retail sales showed a year-on-year increase of 0.3%, which was above the expected decline of 0.2%. However, this growth was below the previous year’s increase of 1.9% and well below the forecast of 1.8%.
Projected Industrial Production
Looking ahead, industrial production for August is projected to rise by 2.8%, building on a prior forecast of 1.8%. For September, the production is expected to decrease by 0.3% month-on-month, reversing from a previous forecasted increase of 0.8%.
The economic data we received for July 2025 shows a clear and unexpected slowdown. Industrial output fell more than forecast, and consumer spending, measured by retail sales, barely grew at all. This suggests the Japanese economy is losing steam as we head into the autumn.
Given this weakness, we believe the Bank of Japan will be forced to hold off on any further interest rate hikes for the remainder of the year. The interest rate gap with other countries remains a key driver, especially as the yield on the 10-year US Treasury is holding firm around 4.3%, significantly higher than Japanese bond yields. This environment makes it favorable to position for a weaker yen, likely seeing the USD/JPY pair test its highs from back in late 2024.
For equity derivatives, a weaker yen typically supports the Nikkei 225 index by boosting the profits of Japan’s large exporting companies. We saw this exact dynamic play out for much of 2024 when the index reached all-time highs despite a sluggish domestic economy. Therefore, buying call options on the Nikkei could be a sensible way to trade this divergence between a weak economy and a strong stock market.
Market Volatility and Investment Strategy
The forward-looking forecasts for industrial production are choppy, with a predicted rebound in August followed by another dip in September. This points towards increased market volatility rather than a smooth trend in the coming weeks. Traders should consider buying protection, such as Nikkei put options, to hedge their long positions against any sudden negative shocks.
In the bond market, this weak data reinforces the case for low Japanese Government Bond (JGB) yields. There is little domestic pressure for the BOJ to tighten policy, so demand for the safety of JGBs should remain stable. This solidifies the yen’s position as a funding currency for carry trades for the foreseeable future.
