Japan’s Tertiary Industry Index fell by 0.4% month on month in February. This followed a 1.7% rise in the previous month.
The latest reading shows a reversal from growth to contraction over the month. The index tracks monthly output in Japan’s service sector.
The recent data showing Japan’s Tertiary Industry Index fell by 0.4% in February is a significant reversal from the strong 1.7% growth seen previously. This is a clear signal of weakness in the domestic service sector, which is the backbone of the economy. We believe this challenges the narrative of a sustained Japanese economic recovery that many had priced in.
This downturn in services makes it highly unlikely the Bank of Japan will consider tightening policy in the near future. Recent March core CPI data, which came in below consensus at 1.9%, further supports a dovish stance from the central bank. Therefore, we are looking at strategies that benefit from a weaker yen, potentially targeting a move in USD/JPY above the 158 level.
For equity traders, this points to headwinds for the Nikkei 225, as domestic consumption appears to be faltering. The disappointing March retail sales figures released last week, which showed growth missing expectations, confirm this consumer weakness. We are therefore considering buying put options on the index to hedge against a potential downturn over the next few weeks.
Looking back, the broad optimism we saw in the latter half of 2025, when services activity was consistently strong, has now faded significantly. The market’s focus has shifted from recovery to concerns about stagflation, especially with global commodity prices remaining firm. This abrupt change in the domestic picture requires a reassessment of long-held bullish positions.
Given the potential for increased market volatility leading into the late April Bank of Japan meeting, we see an opportunity in options. The conflicting signals between a weak domestic economy and a potentially stable global environment could cause sharp price swings. Buying straddles on major currency pairs like EUR/JPY allows us to profit from a significant move, regardless of the direction.
