BOJ Governor Kazuo Ueda recently met with Japan’s Prime Minister Shigeru Ishiba to discuss the economy and financial markets. Ueda confirmed that there are no plans to change interest rates. During their discussions, Ueda and Ishiba talked about the economy and exchange rates. Ueda highlighted that exchange rates should reflect true economic conditions. He said that interest rate hikes could happen if economic growth and price forecasts match expectations. Ueda expressed the importance of working closely with the government while keeping an eye on currency movements. Although they spoke about foreign exchange issues, Ueda didn’t share specific details. In the meantime, the Japanese bond market has seen a rise, with 30-year JGB yields hitting a record 3.26%. This trend aligns with what’s happening in the global bond market, drawing attention to an upcoming 30-year auction. Despite these changes, Ueda’s comments didn’t reveal much new information. The confirmation that there are no changes in the interest rate plan suggests that the Bank of Japan is continuing its path toward normalization. July 2025’s core inflation data showed a steady 2.5%, making this message expected. This indicates we might see at least one more 15-basis-point rate hike by the end of the year. For yen derivatives, the gap in interest rates with the United States is significant, with the Fed funds rate at 4.75%. This difference may cause USD/JPY options’ implied volatility to rise, making strategies like straddles appealing. We shouldn’t anticipate a smooth appreciation of the yen until the interest rate gap narrows. The bond market’s quietness is a key indicator, especially with long-term yields rising. After the Yield Curve Control was dropped in early 2025, the BOJ’s inaction shows it is comfortable allowing long-term rates to adjust. We can plan for rising yields by using derivatives such as interest rate swaps or purchasing puts on JGB futures. Regarding stocks, the continuing hawkish stance may be a challenge for the Nikkei 225. While financial companies might gain from a steeper yield curve, higher borrowing costs could hurt growth sectors. We can consider using Nikkei futures to hedge long positions or buy puts to predict a market correction in the coming month.

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