Last Thursday, the Japanese government conducted its third intervention this year, estimated to have spent about 3.5 trillion yen ($22 billion) to purchase yen. However, intervention alone is unlikely to reverse the yen's downward trend, as the yen's appreciation against the US dollar last week was still less than 2%.
The pressure is once again on the Bank of Japan, with the majority of analysts believing that authorities may need more intervention to reverse the yen's long-term downward trend.
The market widely expects that at the interest rate decision at the end of this month, the Bank of Japan may raise interest rates again, which could be the second rate hike since 2007.
So far this year, the yen has depreciated by 11%, and Japan's inflationary pressures have soared, making the necessity for a rate hike increasingly urgent. Investors are closely watching the CPI data to be released this Friday, with expectations that the June CPI rate will rise slightly to 2.9%, far exceeding the Bank of Japan's 2% target.
Nomura Securities' head of foreign exchange strategy, Yujiro Goto, said:
If the yen continues to weaken before the July meeting, the Bank of Japan may need to consider an earlier rate hike, even when deciding to reduce the pace of bond purchases.
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He believes that if the central bank raises rates by 15 basis points, it could push the yen's exchange rate against the US dollar up by 2-3 yen, but a rate hike alone may not be enough to change the downward trend in exchange rates.
However, market expectations for a rate hike by the Bank of Japan in July have diminished. According to swap market data, the probability of a 10 basis point rate hike by the Bank of Japan in July has fallen from 59% to 51%.
Some analysts also warn that if the Bank of Japan raises rates in July, it may not announce a reduction in bond purchases at the same time.
The reason is that if the Bank of Japan announces a reduction in bond purchases while raising rates, its actions may be seen as driven by exchange rate fluctuations rather than fulfilling its mission to stabilize prices, which could damage the central bank's credibility.Barclays forecasts that the Bank of Japan will raise interest rates by 15 basis points this month, but believes that the impact on the currency will be limited. The head of Asian foreign exchange and emerging markets macro strategy at the bank, Mitul Kotecha, stated:
Although the weakening of the yen has increased expectations for a rate hike by the Bank of Japan this month, we believe that the yield gap between domestic and foreign markets is too large to sustainably reverse the (trend of yen depreciation).