Yen Continues to Weaken, Approaching the 165 "Warning Line"; Kazuo Ueda's Friday Speech Becomes the "Eye of the Storm" in the Forex Market

According to Zhitong Finance APP, this Friday, Bank of Japan Governor Kazuo Ueda will give a speech after the policy meeting, as the yen faces a crucial risk moment. Although the market generally expects the Bank of Japan to keep interest rates unchanged, traders will closely scrutinize Ueda's wording, and any "slip of the tongue" that could trigger further yen depreciation will be closely watched. The yen has continued its weakness this month after falling to its lowest level since 1986 in June.

Despite record-breaking foreign exchange interventions by Japanese authorities last quarter, the yen continues to be weighed down by rising oil prices, fiscal concerns, and a widening Japan-U.S. interest rate differential. While a clearer signal from Ueda may help stabilize the exchange rate, market participants caution that this is unlikely to trigger a significant yen rally.

RBC Bluebay Chief Investment Officer Mark Dowding said: "If Ueda's stance is not hawkish enough, the yen-dollar pair could break below 165. I think Ueda will open the door for a rate hike in September or October, but his degree of hawkishness is insufficient to drive a notable rebound in the yen."

According to informed sources, Bank of Japan officials are open to raising interest rates faster, as the continued depreciation of the yen exacerbates upward inflation risks.

Nevertheless, half of the economists surveyed by Bloomberg expect the Bank of Japan to wait until December to raise the benchmark interest rate, while Prime Minister Sanae Takaichi's government is seen as a potential obstacle to further action. The market is also concerned about Takaichi's proposed plan to reduce food taxes.

Commonwealth Bank of Australia strategist Samara Hammoud noted: "For the yen to strengthen significantly, the Bank of Japan may need to deliver a major hawkish surprise, such as providing clearer forward guidance on the timing of the next rate hike or hinting that a larger increase is still under consideration. Even if the result is somewhat hawkish, we don't think the USD/JPY would reverse course, as fundamentals such as trade conditions and the yield differential remain unfavorable for the yen."

Overnight index swaps show markets pricing a roughly 29% chance of a rate hike in September and about 78% in October.

Strategist Mark Cranfield’s view: What the yen needs is not a gentle nudge, but “shock and awe.” The Bank of Japan needs to put bigger options on the table—hinting that a 50-basis-point hike is possible, to show it is serious about catching up with inflation rather than being content to lag behind. Officials have mentioned that the neutral rate is close to 2%, while the current policy rate is only 1%. Even if the pace is accelerated, reaching that level through gradual tightening may not occur until 2028.

Before the Bank of Japan’s decision, the Federal Reserve will hold its policy meeting first, with the swap market pricing in a 32% probability of a rate hike.

Asset Management One Chief Investment Officer of Fixed Income, Taketomo Shimizu, said: "If the Bank of Japan's press conference is interpreted as dovish, the yen could easily break below 165, which could then trigger intervention."

Japanese Finance Minister Satsuki Katayama warned last week that bold measures would be taken to counter excessive foreign exchange volatility, keeping traders highly alert to intervention risks.

Allianz Global Investors Senior Portfolio Manager Stefan Rittner holds a neutral view on the yen, saying, "As the currency depreciates more rapidly, intervention risk rises, while the negative impact of rising energy prices on Japan’s terms of trade persists." He added, "The Bank of Japan usually prefers to remain flexible, and committing to a specific path now would be inconsistent with this approach."