"Surprise rate hike" + $36.6 billion forex intervention, is the yen stable now?

The Bank of Japan "suddenly raised interest rates" on Wednesday, while data showed that it had intervened in the foreign exchange market with $36.6 billion in July, and the yen may completely avoid the threat of falling to its lowest level since 1990.

After the Bank of Japan's monetary policy meeting on Wednesday, it announced a 15 basis point rate hike, raising the policy interest rate to 0.15%-0.25%, the highest since December 2008 and the largest increase since 2007, contrary to market expectations. At the same time, the Bank of Japan decided to reduce bond purchases by 400 billion yen per quarter, with monthly purchases halving by the first quarter of 2026. Bank of Japan Governor Kazuo Ueda "hawkish" after the meeting, stating that if the economy and inflation support it, interest rates will continue to rise, and 0.5% is not a specific upper limit.

After the Bank of Japan meeting, the yen exchange rate surged, with the yen rising by over 1% against all other G10 currencies. The USD/JPY fell below 150.00 during European trading, and US stocks continued to decline at the opening, with US stocks falling below 149.70 in early trading, hitting a new intraday high since March 19, with a decline of slightly over 2% intraday, poised to fall over 6% in July, marking the largest monthly decline since November 2022.

Monex USA forex trader Helen Given pointed out that many market participants were preparing for the Bank of Japan to raise interest rates, and while there was indeed a possibility of action by the Bank of Japan, few actually expected the rate hike to exceed 10 basis points. This unexpected rate hike has provided a huge boost to the yen, especially considering that investors believed the Fed might signal a rate cut in September after Wednesday's meeting.

Some analysts and strategists believe that the yen's eventual rise stemmed from investors digesting the Bank of Japan's rate hike and Governor Kazuo Ueda's press conference remarks, but there are still many uncertainties about the yen's long-term outlook. StoneX Financial's forex trader Mingze Wu in Singapore commented that after digesting Ueda's press conference remarks, European traders began buying the yen against the dollar. The market seems unstable, with many traders sometimes just waiting for a signal to "start acting."

Hirofumi Suzuki, Chief Forex Strategist at Sumitomo Mitsui Banking Corporation, said that this week the Fed will announce its monetary policy decision, and the US will also release the heavyweight non-farm payrolls report. In the short term, due to the Bank of Japan's pressure on the yen, the USD/JPY may test the 150 level. If the action aligns with its economic and price outlook, the Bank of Japan would be willing to raise interest rates.

Derek Halpenny, Head of Forex Research at Mitsubishi UFJ Financial Group, said that short-term momentum will certainly continue to push the USD/JPY lower, and if Fed Chairman Powell hints after the meeting that a rate cut in September is indeed possible, it may be enough to significantly push the USD/JPY below the 150 level by the end of this week Bloomberg strategists believe that the Japanese yen still has more room to rise at its current levels, as the actions of the Bank of Japan provide short-term upward momentum, even though their ultimate policy choices may have flaws. While raising interest rates, Governor Haruhiko Kuroda also seems to be trying to express a hawkish stance to the fullest extent, which should not be easily overlooked.

Alan Lau, the foreign exchange strategist at Malayan Banking, believes that the Bank of Japan's rate hike on Wednesday seems to be preemptive, as the Bank and Governor Kuroda now appear more confident in the economic and inflation situation, contrasting sharply with their slower response in previous years when there were signs of inflation picking up. If the Federal Reserve can send a stronger signal to start a loose cycle, the US dollar against the Japanese yen may further decline this year.

In addition to the "surprise rate hike," data released by the Japanese government on Wednesday also revealed signs of heavy intervention in the foreign exchange market in July. Media reports point out that the data released by the Japanese Ministry of Finance on Wednesday from June 27 to July 29 is consistent with the results estimated by the Bank of Japan's accounts and currency brokers, all showing that in the past month, the Japanese government has injected intervention funds to support the yen amounting to as much as 5.5 trillion yen, approximately 366 billion US dollars.

On Monday, Atsushi Mimura, the newly appointed top foreign exchange official in Japan and Vice Minister of Finance, stated that intervention is still a means to combat speculation in the foreign exchange market. While the recent depreciation of the yen has its pros and cons, the downsides are becoming increasingly apparent, with rising energy and food prices being one of the negative impacts on consumers and importers due to the depreciation of the yen.

Media reports indicate that after suspected intervention by the Japanese government in July, Japanese Finance Minister Taro Aso and Vice Minister of Finance Masato Kanda have both declined to comment on whether the government intervened in the market, maintaining a strategy of leaving investors to speculate. Mimura's remarks seem to suggest that he may continue to take this stance