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Bank of Japan Governor Ueda discussed the potential effects of US tariffs on both inflation and economic activity. He mentioned that the scale of tariff hikes could significantly impact trade relations.
In the short term, Ueda indicated that US tariffs are expected to drive up US inflation rates. He also warned of possible long-term effects, which could suppress US prices by hindering economic growth.
Global inflationary and economic risks
Concerns were raised about the influence of tariffs on household and corporate sentiment and their subsequent impact on the global economy. Ueda anticipated that forthcoming IMF/G20 meetings would provide additional insights into US tariff policy.
Following these remarks, the USD/JPY currency pair was observed trading near session highs.
Ueda’s remarks centre on the dual nature of tariffs — their ability to push prices higher in the initial stages, while potentially slowing broader growth if sustained. In focusing on the American trajectory, he acknowledges that tighter trade measures may push inflation up in the short run by raising input costs. Goods become more expensive when there are levies on imports. That’s fairly straightforward. But longer out, as higher prices begin to weigh on both consumption and business investment, the effect can flip. Spending slows. Output is trimmed. Inflation, ironically, can settle lower if demand weakens too far.
He chooses his words with precision, sounding cautious rather than alarmist. The suggestion that upcoming multilateral conferences may offer further insight into policy direction shouldn’t be dismissed. It’s a nod to the fact that trade-related policies are rarely domestic in consequence. They radiate.
Market signals and derivative implications
Since the tariff commentary, we’ve seen the yen soften a touch against the dollar — not entirely surprising, given the immediate read that higher US inflation improves the odds of Federal Reserve tightening, or at least delaying any cuts. That tends to support the dollar. For traders working with derivatives on USD/JPY or linked indices, that near-term relief rally for the greenback might appear tempting. Yet uncritical enthusiasm should be met with caution.
The implications stretch beyond just FX. Pricing in outcomes purely through the lens of initial inflation prints risks missing the tail. If American growth shows strain over time — as Ueda gently warns — the associated shift in monetary direction could arrive faster than discounted. Rates would need to soften then. And dollar demand could reverse.
We might think of positioning now through a layered approach. Focus first on how markets are pricing the short-term effects — firm dollar, weaker yen, perhaps firmer equities in export-heavy sectors. Then stress-test those assumptions under a forward curve that anticipates slower US capacity expansion or a drop in consumer appetite. Watch corporate results and retail data carefully. They’re usually early movers when households start second-guessing big-ticket spending commitments.
Don’t ignore the sentiment shift either. Tariffs often work through expectations before they impact hard data. If businesses revise profits lower or hold off on investment, that can ripple through equity positions, and by extension, derivatives valuations. This is particularly relevant where hedging strategies are skewed toward growth assumptions staying intact.
We’ve found that implied volatility across several JPY crosses has not yet reflected this uncertainty. That tells us one thing: options markets haven’t adjusted fully to what this policy turn could represent. For spread traders or those working in synthetic positions, this may allow exposure building before the repricing begins.
In that vein, keep a close eye on forward guidance from other central banks this week. If they start referencing trade policy more actively, it confirms Ueda’s unease isn’t isolated. Contagion isn’t always about financials. Sometimes it’s expectation that moves fastest.
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