Tariff uncertainty and the forthcoming Tankan survey pose potential risks to yen stability, but the prospect of another Bank of Japan (BOJ) rate hike this year supports the Japanese currency. BOJ board member Junko Nakagawa cautioned about the risks associated with U.S. tariff policies, noting the Tankan survey’s role in assessing corporate sentiment amid trade tensions.
BOJ’s Data-Dependent Policy
Nakagawa emphasised that the central bank remains data-dependent and is prepared to adjust monetary policy accordingly. Having previously led Nomura Asset Management, Nakagawa is considered neutral concerning policy.
The BOJ ended its extensive stimulus programme last year and hiked rates to 0.5% in January, aiming for its 2% inflation target. Although the bank maintained its position in July, it raised inflation forecasts and expressed optimism about growth, sustaining expectations for another rate hike this year.
A significant number of analysts anticipate at least a 0.25% rate increase before the end of the year, an expectation that has grown since July. Nakagawa reiterated the high level of uncertainty regarding tariffs’ effects on the economy.
We are seeing a tug-of-war in the yen, with expectations for another Bank of Japan rate hike this year providing support. However, the looming threat of U.S. tariffs, particularly on the auto sector, is capping any major JPY strength. This creates a tense environment for derivative plays in the coming weeks.
Tankan Survey and Yen Prospects
All eyes are now on the upcoming Q3 Tankan survey, which is a critical gauge of business confidence. Looking back, we saw how a surprisingly weak Tankan survey in the first quarter of 2024 delayed the BOJ’s initial policy normalization, so a similar weak reading now could significantly postpone the next anticipated rate hike. This would likely cause a sharp sell-off in the yen, making long-dated JPY put options an interesting hedge.
Given this uncertainty, implied volatility on USD/JPY options has been climbing, recently touching levels reminiscent of the policy shift back in January 2025. We believe traders should consider strategies that profit from price swings rather than betting on a clear direction. Long straddles or strangles could be effective tools to capture a breakout if either the tariff news or the Tankan survey delivers a major surprise.
The BOJ’s data-dependent stance means the next inflation print is also crucial. Last month’s core CPI came in at 2.1%, just above the central bank’s 2% target, but a drop back below that level could reinforce a negative Tankan message. This would push the timeline for a rate hike further out into 2026, forcing a major repricing of JPY interest rate swaps.
