Japan’s Prime Minister, Shigeru Ishiba, plans to direct ministers to develop economic measures to tackle challenges like inflation and US tariffs. This directive could be issued as soon as this week.
Despite calls from lawmakers for his resignation, Ishiba has managed to restore some public backing. The ruling Liberal Democratic Party (LDP) is expected to finalise a report today, analysing their loss in the upper house election from July.
New Economic Package
We’re watching for details of Prime Minister Ishiba’s new economic package this week. With the Nikkei 225 struggling to break the 42,000 mark for the past month, this stimulus could be the push it needs. Traders should consider buying near-term call options on the index to capitalize on a potential government-fueled rally.
The focus on inflation is critical, especially with core CPI recently reported at 2.8% for July 2025, well above the Bank of Japan’s target. This puts pressure on the BoJ to finally move away from the ultra-loose policies we saw even after the initial small hikes in 2024. We see increased volatility in USD/JPY currency options as a likely outcome, with a bias towards yen strength.
We must also hedge against the risk of U.S. tariffs, a familiar threat from the late 2010s that still spooks the market. Japan’s auto sector, which saw its stock index fall 5% last quarter on tariff rhetoric alone, remains particularly vulnerable. Buying put options on auto manufacturer ETFs or the broader Topix index could be a prudent defensive move.
Lingering Political Uncertainty
While Prime Minister Ishiba’s public support has ticked up to 35%, his position is not yet secure following the LDP’s poor election showing in July. This lingering political uncertainty suggests options premiums may rise. We believe buying straddles on the Nikkei 225 could be a smart play, profiting from a large market move in either direction as the political situation clarifies.
