Just now, the Bank of Japan "surrendered"
The Bank of Japan has turned dovish in the face of market instability, resuming arbitrage trading, and it is expected that the Japanese yen may return to a short position. The Deputy Governor of the central bank indirectly admitted that last week's interest rate hike decision was a "disastrous" policy mistake. After a sharp drop in the Japanese stock market, the central bank had to "surrender." This move may put pressure on the Japanese yen. With the central bank shifting back to dovishness, arbitrage trading has resumed, and the Japanese yen may come under pressure again
After the Japanese stock market led the global market into a meltdown, the Bank of Japan "surrendered" by turning "dovish".
On Monday, the historical plunge of the Japanese stock market triggered a global stock market collapse. To stabilize the market, Bank of Japan Deputy Governor Shinichi Uchida came forward today to turn "dovish," stating that there will be no rate hikes when the market is unstable.
Previously, due to an unexpected rate hike by the Bank of Japan last Wednesday, large-scale unwinding of yen carry trades led to a rebound in the yen and a decline in Japanese stocks. It can be said that the global stock market experienced a "Black Monday," and it is not an exaggeration to say that the Bank of Japan is the "main culprit."
During Uchida's speech, the yen resumed its decline, briefly breaking below the 147 level, and the USD/JPY intraday gain expanded to 2%.
In response, Japanese stocks surged, with the Nikkei 225 index rising by over 2%.
Strong selling pressure forces the Bank of Japan to "surrender"
According to media reports, Shinichi Uchida is a senior policy designer with a dovish stance, who has been involved in planning the Bank of Japan's massive easing monetary policy for over a decade. Today, his dovish remarks indirectly acknowledged that the bank's rate hike last week was a "disastrous" policy mistake.
After the Bank of Japan announced the rate hike, yen carry trades began to reverse, leading to a widespread decline in global financial markets. Many investors even predicted that the yen would quickly rise to the 130 level. Faced with panic selling pressure, the Bank of Japan had to overturn its previous policy stance.
UBS trader Alex Lim stated in a report:
"The last thing the Bank of Japan wants is to be seen as the instigator of this severe market sell-off, and in fact, this was indeed triggered by its rate hike on July 31."
"Now the Bank of Japan is clearly under pressure to respond to the market crash and may have to prove the rationale behind its hawkish policy decisions."
Crédit Agricole CIB commented:
"Uchida's remarks confirm that the Bank of Japan may soon (or permanently) adopt a cautious stance on further rate hikes, which will put pressure on the yen."
With the Bank of Japan shifting back to a dovish stance, carry trades may resume, and the yen could once again face heavy short selling.
Some media outlets commented that the Bank of Japan gave up further tightening attempts just because of a "mild bear market" in stocks. It is expected that as the bank continues to maintain a cautious stance, stagflation may return, and the yen exchange rate will hit new lows in the "near future."