Weak Yen, BoJ Prepares Hawkish Signal
The Bank of Japan is starting to open the door to raising interest rates sooner than most economists expect. This stance comes as the continued weakening of the yen is seen as increasing the risk of inflation in Japan.
The BoJ is still expected to maintain its policy rate at its July 31st meeting. However, after previously raising its benchmark interest rate to 1%, its highest level in 31 years, the market is beginning to believe the Japanese central bank could move again sooner than expected.
Several BoJ officials are said to be unwilling to stick to a pattern of six-monthly interest rate hikes. They are prepared to act sooner if inflationary pressures increase, especially as Japan's core inflation is now approaching the central bank's long-held 2% target.
The yen briefly weakened to its lowest level in approximately four decades against the US dollar before strengthening slightly to 162.69 per dollar. The yen's weakening has prompted the Japanese government to reiterate its caution regarding possible action in the foreign exchange market.
In addition to the yen, the Japanese bond market also reacted. The yield on the 2-year Japanese government bond rose to its highest level since 1995, while the 5-year yield moved closer to 2%. This indicates that investors are beginning to anticipate a more aggressive BoJ interest rate path.
As a market impact, the possibility of a faster BoJ rate hike could support the yen and put downward pressure on USD/JPY if market expectations strengthen. However, if the US dollar remains supported by high Treasury yields and geopolitical risks, the yen's strength could be limited. For gold, a Japanese interest rate hike could add pressure to non-yielding assets, but its impact would still be outweighed by the Fed's direction, the US dollar, and the Middle East conflict. (arl)
Source: Newsmaker.id
