Headline: Bank of Japan’s tone turns hawkish: Inflation exceeds expectations, yen appreciates, Nikkei index falls, market bets on October rate hike
The Bank of Japan (BoJ) recently released the minutes of its June monetary policy meeting, revealing a hawkish tone. Some policymakers have begun preparing for an interest rate hike, assuming external tensions, particularly those between the United States and Japan, can ease. While the BoJ maintained interest rates, members emphasized that continued outperformance of inflation and wage growth would warrant tightening policy.
The central bank shifted its tone: downplaying the impact of tariffs and emphasizing the possibility of raising interest rates.
The Bank of Japan’s tone shifted significantly between its June meeting minutes and last week’s July meeting. Governor Kazuo Ueda cited the recently concluded US-Japan trade agreement as a “critical step” that reduced policy risks and boosted confidence in the inflation outlook. He explicitly stated that the central bank was no longer in “wait-and-see mode” and would “continue to raise interest rates” if economic and price trends met expectations. Despite Ueda’s cautious tone, the market interpreted it as a possibility of a rate hike at a future meeting.
Shawn Lee, senior analyst at Ultima Markets, believes that if Japan’s inflation outlook gains greater confidence and US-Japan trade frictions further ease, it will strengthen the case for the Bank of Japan to normalize its policy earlier than planned, thereby boosting the yen. The market currently generally expects the Bank of Japan to start raising interest rates as early as October.
Market reaction: Yen strengthens, Nikkei falls
The yen extended its gains following the release of the Bank of Japan’s minutes, with USD/JPY trading around 147.00, while Japan’s benchmark Nikkei 225 index retreated on expectations of a rate hike.
Technical Analysis: Yen momentum picks up, USD/JPY eyes 150
USD/JPY briefly broke through the psychologically important 150.00 level but quickly retreated, indicating stronger yen buying. Meanwhile, other yen crosses also saw significant declines, such as GBP/JPY, which is forming a potential bearish reversal pattern, suggesting the yen could resume its upward trend in the short term.
Image Source: USD/JPY Daily Chart | Source: Ultima Markets MT5
Image source: GBP/JPY 4-hour chart | Source: Ultima Markets MT5
Investors will be closely watching the “Summary of Opinions” to be released on August 8 for more details on the Bank of Japan’s internal views on inflation and policy timing.
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Author：Joshen Stephen｜Senior Market Analyst at Ultima Markets
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