The Bank of Japan’s June meeting minutes reveal readiness to raise the policy rate if economic and price trends align with forecasts. Inflation is exceeding forecasts, but economic risks from US tariffs require attention.

The current rate is viewed as necessary for economic support, given potential inflation stagnation. The impact of January’s rate hike is scrutinised, with future hikes considered amid trade stability improvements.

Emphasizing Economic Adaptability

While a temporary pause in rate hikes is possible, adaptability to US policy changes is emphasised. Adjustments in monetary support may be needed during economic uncertainty, as inflation rises. The timing of corporate profit assessments and Japan-US trade talks is crucial.

A Ministry of Finance representative stresses flexible BOJ responses to market conditions, particularly in the bond market, given long-term yield rises. Discussion about fiscal and monetary policies addressing the global slowdown is ongoing.

Uncertainty persists about US tariff impacts on Japan’s economy, possibly less severe than expected. Rising food costs, especially for staples like rice, influence inflation, while pricing changes in the food sector are noted. Wage growth and domestic inflation due to labour shortages are monitored alongside consumer expectations.

Market and Policy Shifts

Overall, the BOJ’s approach is cautious and data-dependent amid changing economic conditions. The USD/JPY remains stable around 147.78 post-minutes release.

Based on these June 2025 meeting minutes, the Bank of Japan is signalling a desire to raise rates but remains trapped by economic uncertainty. We are seeing inflation overshoot their forecasts, with recent July 2025 data showing core CPI climbing to 2.8%, well above the 2% target and accelerating from earlier in the year. This upward trend in prices puts persistent pressure on the central bank to act sooner rather than later.

The currency market reflects this tension, with the Yen weakening since June and now trading near 150 against the dollar. This weakness exacerbates imported inflation, making everything from energy to food more expensive and adding to the BOJ’s hawkish dilemma. For traders, this means the risk of a surprise policy shift to support the yen is growing, even if the bank’s official stance is cautious.

Given this backdrop, implied volatility in USD/JPY options will likely remain elevated in the coming weeks. We believe strategies that profit from price swings, such as long straddles, could be effective around key events like the next inflation data release or BOJ meeting dates. The market is coiled for a move, and direction is secondary to the potential for a sharp breakout.

We must not forget the wage growth element, which is a powerful domestic driver for inflation. The final results from the spring 2025 Shunto wage negotiations confirmed an average pay increase of 5.5%, a multi-decade high that fuels consumer spending and price hikes. This robust wage data makes it harder for the BOJ to justify keeping rates at emergency low levels for much longer.

However, the bank’s hesitation is justified by weak growth figures, as the advance estimate for Q2 2025 GDP showed a slight contraction of 0.2%. This creates the classic stagflationary conflict for policymakers, forcing them to choose between fighting inflation or stimulating a fragile economy. This division within the BOJ is the primary source of market uncertainty.

Bond traders are already forcing the issue, with the 10-year Japanese government bond yield recently hitting 1.15%, a level we haven’t seen since 2012. This shows that the market is increasingly pricing in future rate hikes, regardless of the bank’s cautious language. We should watch these yields as a key indicator of market expectations and potential front-running of BOJ policy.

The external risks from US policy, a major concern in the June minutes, have eased slightly following the July trade talks. While no major deal was struck, the agreement to pause new tariffs removes a significant headwind for Japanese exporters. This development may give the BOJ the confidence it needs to focus more on its domestic inflation problem.

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