Looking to the Futures

Japanese stocks rallied Thursday after the Bank of Japan left the benchmark “uncollateralized overnight call rate” unchanged at 0.50%. The Nikkei 225 futures contract (/NKD, currently set for September expiration) gained 115 points to settle at 40795. In the month of July it gained 400 points, bringing it close to the record high of 42545 reached last July.

The rise brings the contract close to its yearly high settlement of 41700 reached last week. That peak came after Japan and the US announced a trade deal that would set US tariffs on Japanese products at 15%. An important facet of the agreement is the tariff rate on autos. The agreement extends the 15% rate to include vehicles, while most other trade partners face a 25% levy. The impact was felt most acutely in the auto sector, where Tokyo-listed shares of Toyota (TM) gained 15% on the news, with Nissan (NSANY) and Honda (HMC) both up over 11%. Much of the volatility this year comes from concerns on tariffs and trade. Shortly after the Liberation Day tariffs were announced, the Nikkei dropped to an intraday low of 30560, the lowest since October 2023.

In holding the rate at 0.50%, the BoJ kept rates at the highest level since 2008. From 2010 through early last year, the rate has been at zero or below, with the Bank maintaining a rate of -0.1% from 2016 until last March. The concern over much of that time frame has been deflation, as Japan continues to deal with an aging, declining population. Negative rates have not been the most extreme policy to pursue economic growth. Coinciding with the zero/negative interest rate policy, the Bank purchased Japanese equities in massive numbers. The equity purchase program ran from 2010 to 2024. At its peak, the Bank’s portfolio represented 7% of the nation’s stock market.

While deflation has been a persistent concern of the Bank, the new focus is on inflation. The quarterly Outlook for Economic Activity and Prices is the BOJ’s version of the Summary of Economic Projections published by the Fed four times per year. The report said the committee will raise interest rates if GDP and inflation meet its forecasts. The Bank said inflation for the year is likely to be between 2.5% and 3.0% this year and close to its 2% target (same as the Fed) over the next two years.