ING forecasts Japan’s first-quarter GDP will rise 0.3% quarter-on-quarter on a seasonally adjusted basis. This suggests growth at a similar pace to the previous quarter.
The energy shock linked to the war is expected to have a limited effect on trade and overall growth. Its impact is expected to be clearer in inflation.
Outlook Based On Early 2025 Forecasts
April inflation is forecast at 1.8% year-on-year, compared with 1.5% in March. Subsidies that cap energy costs are expected to limit broader price pressures.
Looking back at the analysis from early 2025, we believed the economy would see steady growth and that energy-related price pressures would be contained. The forecast then was for a 0.3% quarterly GDP rise and April inflation hitting 1.8%, softened by government subsidies. This outlook pointed towards a stable, low-volatility environment.
The situation today in May 2026 is quite different, as that anticipated stability never fully materialized. Japan’s latest GDP figures for the first quarter of 2026 showed a minor contraction of 0.1%, falling short of expectations and highlighting ongoing economic fragility. This contrasts sharply with the modest but consistent growth we foresaw last year.
Furthermore, inflation has proven much more persistent than anticipated, with the subsidies that once capped prices now phased out. The national Core CPI for April 2026 was just released, showing a 2.5% year-on-year increase, a level that has kept pressure on the Bank of Japan. Much of this is driven by the yen’s prolonged weakness, with USD/JPY hovering around the 158 level, which continues to import inflation.
Implications For Policy And Markets
This divergence creates a difficult environment for the Bank of Japan, which has already moved away from negative interest rates back in 2024. The market is now pricing in at least one more small rate hike this year to combat inflation and support the yen. However, the weak GDP figure makes aggressive tightening a risky move for the central bank.
For derivative traders, this conflict between sluggish growth and persistent inflation suggests playing volatility rather than direction. Nikkei 225 options are particularly relevant, as uncertainty over the BOJ’s next move could lead to sharp swings in equities. A long straddle, buying both a call and a put option with the same strike price and expiry, could profit from a significant market move in either direction.
Similarly, currency markets are a key focus, with the weak yen at a critical juncture. Traders should consider using options on USD/JPY to manage risk and position for a potential policy surprise. Any sign of a more hawkish stance from the BOJ could trigger a rapid appreciation in the yen, making long-dated put options on USD/JPY an interesting hedge.
