Authorities suspected of intervening in the foreign exchange market for the third time, causing the Japanese yen to soar. The Bank of Japan may ease pressure on tightening policies by the end of the month

Zhitong Finance APP noticed that on Thursday, the Japanese yen surged significantly due to suspicions of intervention in the foreign exchange market by Japanese authorities, which may alleviate the pressure on the Bank of Japan to tighten monetary policy on a large scale at the end of this month.

Several analysts have stated that if the Bank of Japan announces a reduction in bond purchases while raising interest rates, its actions may be seen as driven by the volatile yen rather than its mission to stabilize prices.

Analysts also noted that lower-than-expected US inflation data supported reasons for the Federal Reserve to cut interest rates and for the weakening of the US dollar, which boosted the yen.

Japanese Authorities Suspected of Third Intervention in the Foreign Exchange Market

Last month, Bank of Japan Governor Haruhiko Kuroda stated that the recent weakening of the yen was one of the factors causing excessive inflation, and he is closely monitoring the yen's movements. However, observers at the central bank said that policymakers may not want to be seen as forced to take action to boost the yen, as this could raise questions about their independence.

Shoki Omori, Chief Strategist at Tokyo Mizuho Securities, stated that the Japanese Ministry of Finance may have intervened in the currency market "because it believes that the likelihood of the Bank of Japan implementing a dual tightening policy of reducing bond purchases and raising interest rates this month is low."

On Thursday, the yen rose nearly 2% against the US dollar, then retraced some of its gains, fluctuating around 159 on Friday. Japan's top foreign exchange official, Masato Kanda, did not comment on whether the Japanese Ministry of Finance supported this move.

Strategist Mark Cranfield stated, "The yen needs strong follow-up actions to sustain its upward momentum. The Bank of Japan's next meeting is nearly three weeks away, and the Japanese Ministry of Finance should leverage this time to its advantage, otherwise it could be seen as another buying opportunity for dollar bulls."

Yoshimasa Maruyama, economist at Mitsubishi UFJ Morgan Stanley Securities, wrote in a report, "Stronger speculation about a US rate cut reduces the likelihood of the Bank of Japan raising rates again this month to counter the weakening yen."

The last time Japan was suspected of intervening was between April 29 and May 2, but the yen erased its gains in less than three months and fell to new lows.

Takashi Fujiwara, Chief Fund Manager of the Fixed Income Investment Department at Tokyo Ryuson Asset Management, stated that if the Bank of Japan raises rates this month, "monetary policy will be seen as linked to the exchange rate," and "when the yen depreciates further, the market will push for tighter policies by the central bank." Not all experts believe that the Bank of Japan will not raise interest rates on July 31st. Yujiro Goto, Chief Foreign Exchange Strategist at Nomura Securities in Tokyo, stated that the overnight intervention is expected to enhance expectations for a tough decision by the Bank of Japan and increase upward pressure on the Japanese yen.

However, some analysts believe that the Bank of Japan hopes to avoid hastily taking policy measures. Naomi Muguruma, Chief Fixed Income Strategist at Mitsubishi UFJ Morgan Stanley Securities, stated that the Bank of Japan has been slow to act in reducing bond purchases, as evidenced by taking a month and a half to communicate with market participants before making a decision.

With Japan's policy interest rate more than 500 basis points lower than the United States and 400 basis points lower than the Eurozone, the yen still faces significant headwinds.

"The Japanese Ministry of Finance has simply given investors an opportunity to buy the USD/JPY on dips," said Omori of Mizuho. "The currency pair is likely to rebound to the 161 level before the next Federal Reserve meeting on July 30th to 31st."