The yen continued to rise, driving arbitrage trading to close out positions. The actions of the Bank of Japan are closely watched

According to the Zhitong Finance APP, the Japanese Yen to US Dollar exchange rate rose above a key level on Wednesday, leading to further unwinding of global arbitrage trades. Data shows that the US Dollar to Japanese Yen exchange rate fell below the 100-day moving average for the first time since mid-March, and simultaneously dropped below the important psychological level of 1 US Dollar to 155 Japanese Yen. In addition, technical indicators suggest that the upward trend of the Yen may continue.

Since falling to a near 40-year low on July 3rd, the Yen has risen by over 4.5%. Factors such as suspected intervention in the currency market by Japanese authorities on July 11th and 12th, calls from prominent figures in Japanese politics for the Bank of Japan to raise interest rates to boost the Yen, and the inclination of US Republican presidential candidate Trump to devalue the US Dollar have all helped drive the recent rebound of the Yen.

In recent years, the Bank of Japan's ultra-loose monetary policy has made the Yen a favored source of funds for arbitrage traders. However, as investors bet on further rate hikes by the Bank of Japan and potential additional intervention by Japanese authorities in the currency market, arbitrage trades involving borrowing Yen and investing in higher-yielding currencies are being unwound.

It was reported that Toshihiro Nikai, Secretary-General of the Liberal Democratic Party of Japan, stated earlier this week that the Bank of Japan should clearly demonstrate its determination to normalize its monetary policy, including gradually raising interest rates. Nikai added, "Excessive depreciation of the Yen is obviously detrimental to the Japanese economy."

Japanese Digital Minister Taro Kono emphasized the issues brought about by the significant depreciation of the Yen against the US Dollar last week, including the inflationary effects on domestic prices in Japan. He stated that while a weaker Yen is beneficial for boosting exports, this advantage has become limited as many Japanese companies have production facilities overseas.

Keiichi Iguchi, Senior Strategist at Tokyo's Resona Holdings, commented, "The remarks by Toshihiro Nikai and Taro Kono have increased people's caution about the possibility of the Bank of Japan raising interest rates. Coupled with the intervention in the Yen earlier this month, a rate hike by the Bank of Japan could signal the end of the Yen's weakness."

Cloud of Doubt Looms Over Rate Hike, Bank of Japan Faces Tough Decision

As the Bank of Japan's policy meeting approaches, all eyes are on how the central bank will balance its monetary policy to address weak consumer spending and persistent inflationary pressures. Bank of Japan officials must find a delicate balance between maintaining economic stability and supporting the Yen. Their decisions will not only impact Japan's economic outlook but may also have far-reaching effects on global financial markets According to sources, Bank of Japan officials believe that the decision on whether to raise interest rates at next week's policy meeting has become complicated due to weak consumer spending. Some officials are leaning towards not raising rates in July to allow more time to examine upcoming data to confirm if consumer spending will rebound. However, there are also officials willing to raise rates at the July meeting, as they consider the Bank of Japan's policy rate range of 0% to 0.1% to be very low, and given the uncertainties ahead, they may miss the opportunity to raise rates.

Overnight index swap trading suggests a 33% chance that the Bank of Japan will raise rates by 15 basis points at the end of this month's policy meeting. Additionally, a media survey shows that only about 30% of Bank of Japan watchers expect the Bank of Japan to raise rates at the end of this month, but over 90% of respondents believe there is a risk of a rate hike.

It is worth noting that another key point at the Bank of Japan's policy meeting at the end of this month is the extent to which the Bank of Japan will reduce its monthly bond purchase amount. Analysts expect the Bank of Japan to start reducing its bond purchase size by 1 trillion yen per month from August, down to 5 trillion yen per month (equivalent to $320 billion); in the long term, based on median estimates, the Bank of Japan will reduce the monthly purchase amount to 3 trillion yen within two years.

Among analysts who do not expect the Bank of Japan to take any rate hike action this month, many believe that combining a rate hike with announcing a quantitative tightening path would cause too much impact, and there is also too much uncertainty in the market's reaction to the "double action." Naomi Muguruma, Chief Fixed Income Strategist at Mitsubishi UFJ Morgan Stanley Securities, said, "The possibility of raising rates and announcing a reduction in the bond program at the same time is very low. It is hard to imagine that after spending 1.5 months finalizing the bond plan to convey its very cautious stance, the Bank of Japan would suddenly take bold action."