Has the Bank of Japan "surrendered"? Can the market breathe a sigh of relief?

On Wednesday, the market cheered due to remarks from a senior official of the Bank of Japan. BOJ Deputy Governor Shinichi Uchida stated that there will be no rate hike in the face of financial market instability. This statement seemed to bring some comfort to the recent turmoil in global stock markets, however, some analysts believe that this comfort may be short-lived.

After Uchida's statement, the yen weakened, and both Japanese and U.S. stocks rebounded significantly. This reaction proved that investors "like the central bank governor's attempts to soothe the market with mild remarks," but this does not solve the fundamental problem, as stated by Peter Boockvar, Chief Investment Officer of Bleakley Financial Group in a recent report.

"The Bank of Japan's policy committee always seems to do the wrong thing, if they do not raise rates now, arbitrage trading will return, and inflation and a weak currency will continue to erode the purchasing power of the Japanese people," Boockvar wrote, describing the central bank's dilemma.

The unwinding of yen carry trades is not the only catalyst for this round of selling, as a series of lower-than-expected economic data last week, including the July employment report released last Friday, sparked recession fears.

Therefore, market action is not just about the yen, but it "remains a key component of risk and the correlation between the yen and global stocks, and this correlation has not diminished today," said Bob Savage, BNY's Head of Market Strategy and Insight, in a report on Wednesday morning.

Savage stated that in the long run, the yen's trend may still be stronger. However, currently, "the likelihood of further rate hikes by the Bank of Japan has diminished, and the Japanese domestic market has breathed a sigh of relief. For the rest of the world, this is not such a clear signal."

A key question for analysts is whether Shinichi Uchida's remarks will reignite carry trades.

"This statement has given carry traders the green light to short the yen again, buy high-yield currencies and assets," said Matthew Weller, Global Head of Research at Forex.com and City Index, in a report.

Nevertheless, Weller acknowledges that Japan is only part of carry trades, and as other developed economies show clear signs of slowing in the second half of the year, central banks like the Fed and the Bank of England may still significantly cut rates in the coming months. This will limit yen carry trades.

"In the end, traders' key focus is on whether the U.S. and other developed economies are sliding into recession, and the answer to this question will determine the future trends of the foreign exchange, bond, and stock markets," he wrote