As expectations of a Bank of Japan rate hike strengthen and an additional hike in September is being discussed, yen weakness, energy inflation and monetary policy normalization are said to be the focus of the FX market.
Following the Bank of Japan's decision to raise its policy rate to 1.0% in June, market expectations are said to be growing that it will deliver an additional hike to 1.25% in September. Traders are adjusting their positions in advance in response to upcoming central bank statements, inflation forecasts and remarks by policymakers, and the policy stance, whether more hawkish or more cautious than expected, is said to be a major factor affecting the yen.
The wide interest rate differential between Japan and the United States is seen as the main cause of yen weakness. Whether Japan's terminal rate will rise to 1.5%–1.75%, and how the pace of rate cuts in other countries, including the United States, will develop, are said to be key market focuses. These factors are said to affect volatility in USD/JPY, EUR/JPY and GBP/JPY.
Rising energy prices are said to further worsen Japan's imported inflation, and the weaker the yen becomes, the greater the potential acceleration in costs when converted into yen. Market concerns have also been raised that fiscal policy developments, in addition to Bank of Japan rate hikes, will affect the yen.
While foreign exchange intervention can have a short-term effect, it is said to be potentially insufficient to change long-term trends, prompting renewed emphasis on the importance of risk management and stop-loss plans. If expansionary fiscal policy pushes up demand and inflation expectations, the central bank's decision-making is said to become even more difficult.