The Bank of Japan’s minutes from their May meeting will be available at 2350 GMT (1950 US Eastern time). A preview is already available based on the Summary of Opinions from the Monetary Policy Meeting held on April 30 and May 1, 2025. Bank of Japan Governor Kazuo Ueda will address the Annual Trust Association Meeting, though the exact time of his speech is not yet confirmed. In May 2025, Japan’s Consumer Price Index (CPI) stayed above the Bank of Japan’s target rate, continuing the central bank’s ongoing evaluations. The summary from the late-April and early-May meetings gives some hints about the tone of the full minutes. These excerpts indicate a persistent inflation above the desired target. Although the central bank has made only gradual changes so far, there’s a growing belief that monetary support might need to decrease sooner than expected. Governor Ueda’s upcoming speech may echo these concerns, especially given the steady CPI readings. Since inflation isn’t decreasing, it suggests that policies could become stricter, either soon or in the coming quarters. There’s also worry about waiting too long to make changes. Traders should pay close attention to Ueda’s words, as they often reveal more than official statements. For short-term traders focusing on interest rate products and volatility linked to JPY-denominated assets, the focus should shift to the yield curve’s predictions for potential changes, not just the policy rate. There’s clear evidence of internal disagreements within the central bank. Some members are more vocal about ongoing inflation and currency weakness pushing prices up. This could lead to increased volatility following each new CPI report or economic forecast. We should monitor the implied volatility in options for Japanese government bonds, especially as it might increase around key announcements from the monetary authorities. Even if no rate change happens at the next meeting, clearer forward guidance could lead swap markets to widen expectations, affecting cash bond yields and forward contracts. Traders should consider two key questions: what happens if the yen weakens further? What actions would lead to a sharper domestic tightening? These signals are increasingly relevant now. The output gap has narrowed, labor markets are tight, and higher import costs are being passed on to consumers. Conditions that would not have prompted policy changes a year ago are now different. Members like Nakagawa are voicing concerns that inflation may not just be temporary, especially as energy costs continue to rise. As a result, carry trades involving Japanese government bonds (JGBs) may now be priced too optimistically. Our models indicate a slight increase in market-based inflation expectations. While not alarming, this suggests a need to rethink any short-term holdings relying on long-term dovish policies. Upcoming option expirations should be evaluated accordingly, especially where gamma exposure is sensitive to sudden changes. Overall, there’s a trend: comments from the monetary board are becoming less patient. While not overtly hawkish, they are not neutral either. Japan’s usually flat interest rate structure may soon begin to rise again if policy changes accelerate. Repricing will be inconsistent, but for those in swaps, futures, or leveraged bond ETFs, timing the sentiment shift could be more crucial than just predicting direction. We believe that hedging strategies will need quick adjustments in the next few weeks. Keep an eye on changes not only in headline CPI but also in core readings that exclude fresh food and energy. These core figures will increasingly influence policy decisions from the board’s key members. A careful analysis of the next minutes will be crucial to understanding when—and not if—the next policy change will occur.

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