The Bank of Japan Governor Kazuo Ueda stated that underlying inflation in Japan is gradually rising towards 2%. Despite the impact of US tariffs, Japan’s economy is showing resilience.
There has been no material impact observed on capital expenditure, wages, and employment trends. Therefore, Governor Ueda indicated there is no need to adjust the July outlook report figures.
Assessing Tariff Impact
However, uncertainty persists regarding the effects of US trade policies on foreign exchange rates. The Bank of Japan will thoroughly assess the impact of tariffs on the economy, including businesses’ responses.
We see Governor Ueda’s comments as a signal to expect more of the same, which means the Bank of Japan will continue its slow pace towards policy normalization. The latest core-core inflation data for August 2025, which came in at 1.9%, supports his view that the 2% target is within reach but not yet sustainably achieved. This steadiness suggests that front-end JGB futures volatility may decline in the immediate term.
This reinforces our view that another rate hike is more likely a late fourth-quarter event rather than an October surprise. After the small hike to 0.25% earlier in 2025, overnight index swaps are not yet fully pricing in another move, presenting an opportunity for traders to position for a December hike. The solid results from the 2025 spring wage talks, which secured an average 4.5% rise, give the BOJ the cover it needs to eventually act.
Currency Market Implications
For currency traders, Ueda’s specific mention of uncertainty around forex is key, especially with USD/JPY hovering near 158. His cautious tone suggests the BOJ will not hike rates aggressively just to defend the currency, leaving the yen vulnerable to further weakness. This keeps the threat of direct market intervention on the table, similar to what we saw back in September and October of 2022.
Given this, buying near-term, out-of-the-money call options on USD/JPY could be a cost-effective way to position for a continued grind higher. The main risk remains sharp, sudden intervention from the Ministry of Finance rather than a policy shift from the BOJ itself. We believe Ueda’s focus on tariffs is more about managing future risks than signaling an imminent policy change.
The resilience of the Japanese economy, which recent Tankan surveys have confirmed, means the BOJ will remain focused on domestic inflation data. This makes the next set of Tokyo CPI figures a critical data point to watch for any sign of accelerating price pressures. Until we see a clear and sustained break above 2%, the BOJ is likely to remain patient.
