Yen falls below 163, Bank of Japan may hold steady this week! Forced to intervene in September?

The Bank of Japan may hit pause this week to assess the impact after previously raising the policy rate to its highest level in thirty years.

To determine the timing and pace of future policy moves, the market will closely watch the Bank of Japan's latest economic growth and inflation forecasts.

Meeting Expectations The market widely expects the Bank of Japan to keep its policy rate unchanged at 1% in the two-day monetary policy meeting ending this Friday.

During the last meeting held in June, the Bank of Japan raised rates to the highest level in 31 years, stating that due to rising oil prices, underlying inflation could exceed the central bank’s 2% target.

Amid continued inflationary pressures, the Bank of Japan’s stance on tightening monetary policy remains unchanged. Currently, the market expects the Bank of Japan to conduct at least one more rate hike before the end of this year.

Economic Outlook The Bank of Japan’s policy board will release its quarterly economic outlook report alongside the rate decision, including the latest forecasts for economic growth and prices.

Although uncertainty in the Middle East has driven crude oil prices up again, Bank of Japan officials believe that the risk of a significant downturn in the Japanese economy is low.

They anticipate that the Japanese government will ensure sufficient energy supply by bypassing the Strait of Hormuz in transportation routes.

Yen Pressure Weakness in the yen remains one of the main factors affecting Japan’s price trends. With energy prices already elevated, further depreciation of the yen could push import costs higher.

Currently, the yen-dollar exchange rate is hovering around 163.70.

Barclays economists noted that, in a risk scenario, if the yen declines further and government intervention in the exchange rate fails to stem the fall, the Bank of Japan may be forced to hike rates ahead of schedule in September.

Market Focus: Investors will pay close attention to remarks by Bank of Japan Governor Kazuo Ueda after the meeting for clues regarding the timing of the next rate hike, with a particular focus on whether he further emphasizes the risk of inflation exceeding the target.

Bank of America analyst Tomonobu Yamashita noted that whether the market will price in a more aggressive rate hike path largely depends on the attitude of Japanese Prime Minister Sanae Takaichi.

He said that government influence on Bank of Japan policy will be under close scrutiny, especially regarding the views expressed by the Cabinet Office representative in the “Summary of Opinions” following this week’s meeting.

Despite continued price increases, Sanae Takaichi maintained a cautious stance on Monday.

She stated: “At present, we believe the Japanese economy has not yet completely shaken off the risk of returning to deflation. In other words, we still cannot say Japan has completely overcome deflation.”

She added: “It is especially necessary to closely monitor the impact that the Middle East situation could have on the real economy.”