Insights 
VT 
In July 2025, Japan’s Jibun Bank Services PMI rose to 53.6, the fastest expansion in five months, up from 51.7 in June. This surge was attributed to strong domestic demand, which compensated for a sharp decline in export orders and fewer tourists.
New domestic business orders grew at their quickest rate in three months. Export orders fell for the first time since December, declining at the fastest pace in over three years, with weak tourist numbers partly due to earthquake concerns in July.
Employment Level Remains Steady
The employment level in services remained steady, ending a 21-month period of job growth as firms faced labour shortages and tight budgets. Price pressures eased, with input cost inflation at a 17-month low and output prices rising at the slowest rate in nine months.
The Composite PMI, which includes both manufacturing and services, slightly increased to 51.6, the highest since February. Manufacturing, however, slipped into contraction, while services remained the main driver of growth.
Given the new data, we should anticipate continued weakness in the Japanese Yen. Easing inflation and a sharp drop in export orders reduce any immediate pressure on the Bank of Japan to raise interest rates, especially after it held rates steady in its late July meeting. With the yen already testing the 165 level against the dollar, options traders might consider buying USD/JPY calls to capitalize on the widening policy gap with the US Federal Reserve.
The divergence between strong domestic services and contracting manufacturing suggests a targeted approach to the Nikkei 225. We could see outperformance in domestic-focused sectors like retail and real estate, while major exporters like automakers and electronics may face headwinds. This presents a classic pair trade opportunity, going long domestic consumer stocks and short industrial exporters.
Industrial Sector Weakness
This weakness in the industrial sector is not an isolated reading. We saw Japan’s industrial production figures for June 2025, released last week, show a 2.5% month-on-month decline, confirming the trend seen in the PMI. The flat employment reading in the services sector is also a warning sign that the domestic engine may be starting to sputter.
We can look back to the period in late 2023 and early 2024 for a similar pattern, where a weak yen failed to meaningfully boost export volumes despite lifting corporate profits. This history suggests that the current sharp drop in export orders is a significant red flag for the broader economy. It signals that global demand is a more powerful force than currency effects right now.
For derivatives, the key takeaway is the potential for rising volatility. The stark contrast between the domestic and external economies creates significant uncertainty, which is not yet fully priced into Nikkei options. Straddles or strangles could be an effective way to position for a significant market move in the coming weeks without betting on a specific direction.
