In July, Tokyo’s core inflation surpassed the Bank of Japan’s 2% target. This supports the possibility of a rate hike either later this year or in early 2026.
Core CPI, excluding fresh food, increased by 2.9% year-on-year in July. This was slightly below the predicted 3.0% and a decrease from June’s 3.1%.
Core Core Inflation Rate
The core-core inflation rate, which excludes both fresh food and fuel, was unchanged at 3.1% year-on-year. This measure is closely monitored by the BOJ to assess domestic price pressures.
This information will influence the BOJ’s July 30–31 policy meeting. While expectations exist for an upward revision of the inflation forecast, it is anticipated that interest rates will remain unchanged for the time being.
Based on the analysis from Sheridan, we see the persistent inflation data as a clear signal for positioning in the coming weeks. The Bank of Japan is being boxed into a more hawkish stance, which fundamentally alters the risk landscape for yen-denominated assets. Traders should prepare for policy shifts that may come sooner than the late 2025 timeline suggests.
Impact On The Yen And Bonds
The yen has been exceptionally weak, with the USD/JPY pair recently touching 34-year highs near 160. Given the inflation pressure, we believe traders should consider buying call options on the JPY, which provide upside exposure if the central bank surprises with hawkish language at its July meeting. This strategy allows for profiting from a potential sharp strengthening of the currency while capping downside risk.
This expectation of tighter policy directly impacts Japanese government bonds, suggesting yields will climb from their current levels. National core inflation already hit 2.8% in June, supporting the view that price pressures are not abating. We see value in using interest rate futures to bet on rising bond yields ahead of the central bank’s upcoming inflation forecast revision.
A hawkish turn often creates headwinds for equities, which could make the Nikkei 225 index vulnerable. We anticipate a rise in market volatility, a trend historically seen around policy decision dates. Purchasing put options on the Nikkei 225 can serve as an effective hedge or a direct bet on a market pullback driven by higher borrowing costs.
However, we must also consider the market’s reaction to the historic rate hike in March 2024, after which the yen surprisingly weakened. This was because the policy guidance was seen as not aggressive enough, a classic “buy the rumor, sell the fact” event. Any derivative positions should therefore be structured to withstand potential short-term volatility if the bank’s message underwhelms hawkish expectations.
