Tokyo’s consumer price index excluding food and energy rose 1.5% year on year in April. This was down from 1.7% in the previous period.
The data point refers to Tokyo inflation with both food and energy removed. It shows a slower pace of price growth in April than before.
Implications For Bank Of Japan Policy
The drop in Tokyo’s core inflation to 1.5% is a significant signal for us. This data moves further away from the Bank of Japan’s 2% target, casting doubt on their ability to raise interest rates again this quarter. It suggests the inflationary pressures we saw building through 2025 might be losing momentum.
We see this as a green light to position for further yen weakness. With the Bank of Japan’s next meeting on May 28th, expectations for a hawkish stance will now be significantly lower, widening the policy gap with the US Federal Reserve. We should consider buying USD/JPY call options targeting a move back towards the March highs near 162.50.
Consequently, this environment is supportive for Japanese equities, particularly the export-heavy Nikkei 225. A weaker yen directly boosts the overseas earnings for companies that make up over 45% of the index’s market capitalization. We believe buying Nikkei 225 futures or out-of-the-money calls is a prudent way to play this trend.
For the rates market, this inflation miss should put downward pressure on Japanese Government Bond yields. The market had been pricing in a potential summer rate hike after the BoJ’s landmark exit from negative rates back in early 2025. Now, we anticipate the 10-year JGB yield, currently at 0.95%, could re-test the 0.80% level seen earlier this year.
Positioning Around Volatility
Given the uncertainty, we should also look at currency volatility, which remains elevated. Implied volatility on USD/JPY options has ticked up to 9.8%, reflecting the market’s nervousness around potential government intervention to support the yen. A cost-effective strategy could be a bull call spread on USD/JPY, which limits the initial premium paid while still capturing upside.
