The yen's jump eases depreciation pressure, will the Bank of Japan raise interest rates in July?

According to several analysts, the Japanese yen surged nearly 3% on Thursday due to suspected intervention by the Japanese government. On Friday, there was suspected intervention again, which may ease the pressure on the Bank of Japan to raise interest rates at the end of this month.

On Thursday, the USD/JPY exchange rate soared 3% to 157.40 at one point, but then retraced some of the gains. Daily operation data released by the Bank of Japan on Friday showed that the central bank spent ¥3.37-3.57 trillion (US$211.8-220 billion) buying yen on Thursday, less than three months since the last intervention. On Friday, the USD/JPY surged over 0.8% to 157.49, and the Japanese government "suspectedly" intervened in the foreign exchange market again. Kanda Masato, Vice Minister of Finance for International Affairs, responded that he could not confirm whether Japanese authorities intervened in the foreign exchange market.

In response, Shoki Omori, Chief Strategist at Mizuho Securities in Tokyo, stated:

"The reason why the Ministry of Finance intervened in the foreign exchange market may be because it believes that the Bank of Japan is unlikely to reduce bond purchases and raise interest rates simultaneously this month."

One of the main responsibilities of the Bank of Japan is to control inflation through monetary policy. When the yen appreciates rapidly, it eases the pressure on imported goods prices, thereby reducing domestic inflationary pressures. Therefore, the central bank may feel that there is no need to further tighten monetary policy through measures such as raising interest rates or reducing bond purchases.

Furthermore, analysts also pointed out that lower-than-expected US inflation data, rising expectations of a Fed rate cut, and a weaker US dollar have boosted the yen. Yoshimasa Maruyama, economist at SMBC Nikko Securities, said:

"Enhanced expectations of a Fed rate cut in the US have reduced the likelihood of the Bank of Japan being forced to raise interest rates this month to counter the depreciation of the yen."

Moreover, Bank of Japan Governor Haruhiko Kuroda stated last month that the recent weakening of the yen is one factor beyond expectations of inflation, and he is closely monitoring the yen. Analysts suggest that if the Bank of Japan were to raise interest rates in the current environment while reducing bond purchases, the market may interpret it as the central bank responding to the sharp fluctuations in the yen rather than fulfilling its duty to stabilize prices. This interpretation could damage the central bank's independence and credibility, as it would appear to be pressured by the market rather than based on economic fundamentals.

Takashi Fujiwara, Chief Fund Manager at Resona Asset Management, said:

"If the Bank of Japan raises interest rates this month, monetary policy will be seen as linked to the exchange rate, and when the yen depreciates again, the market will expect the central bank to be forced to adopt a tightening policy."

Yen's Sharp Rise May Ease Pressure on Bank of Japan to Raise Interest Rates

Media strategist Mark Cranfield stated:

"The yen needs strong follow-up actions to sustain any gains. With nearly three weeks until the next Bank of Japan meeting, the Ministry of Finance should consolidate its advantageous position, otherwise it may be seen as another buying opportunity for USD bulls."

However, not all experts believe that the Bank of Japan will not raise interest rates on July 31. NOMURA Securities' Chief Foreign Exchange Strategist Goto Yujiro stated:

"The overnight obvious intervention is expected to prompt the Bank of Japan to make a hawkish decision, increasing the pressure for the yen to appreciate."

Others have also indicated that the Bank of Japan is not willing to take policy actions hastily.

Mitsubishi UFJ Morgan Stanley Securities' Chief Fixed Income Strategist Muguruma Naomi pointed out:

"The Bank of Japan's slow reduction in bond purchases is evidence that the central bank has been communicating extensively with market participants, taking a month and a half to make a decision."

Moreover, Japan's policy interest rate is more than 500 basis points lower than that of the United States and 400 basis points lower than that of the Eurozone, leaving the yen still facing significant headwinds. Omori from Mizuho stated:

"The Ministry of Finance has provided investors with an opportunity to buy the USD/JPY on dips, and it is highly likely that the USD/JPY will rebound to the 161 level before the July 30-31 Federal Reserve meeting."