NHK, Jiji Press and Nikkei all broke the news late at night that the Bank of Japan was considering raising interest rates by 15 basis points to 0.25% at the meeting that ended on Wednesday, which exceeded market expectations. The market still only priced in a 55% chance of a 10 basis point rate hike. The Bank of Japan is also expected to detail plans to reduce its massive bond purchases in its resolution statement on Wednesday.

The Bank of Japan is considering raising its policy rate to 0.25% at a meeting that ends on Wednesday, and is also considering a decision to reduce the size and pace of its monthly purchases of Japanese government bonds, according to Nikkei.

The Bank of Japan is considering raising short-term interest rates to around 0.25% from the current 0%-0.1% at a two-day policy meeting that ends on Wednesday, according to Jiji Press. In March, the Bank of Japan decided to end eight years of negative interest rates and yield controls, a move that underscored its determination to steadily withdraw from massive monetary stimulus. Bank of Japan Governor Kazuo Ueda has said the bank will raise rates further if it is convinced that rising wages will push up service prices and keep inflation around its 2% target for a long time. While many market participants expect the Bank of Japan to raise short-term interest rates this year, they are divided over the specific timing of the hike.

According to NHK, the Bank of Japan will discuss a 15 basis point rate hike, rather than the 10 basis point hike that the market has been considering, which would raise the rate from 0.10% to 0.25%. Some committee members believe that the risk of a depreciating yen pushing up prices should be closely monitored. However, some members of the committee are cautious, and consumption trends should be further observed given the continued negative growth in real wages. They will make a final decision after analyzing the latest economic data. In addition, the Bank of Japan will decide on a specific plan to reduce its purchases of government bonds.

The yen rose on Tuesday, with USD/JPY briefly falling below 153. The yen held on to its biggest monthly gain in a year and a half, as investors awaited central bank decisions on Wednesday that could extend or reverse gains.

“We’ve seen quite a bit of movement in the yen today (Tuesday),” said Shaun Osborne, chief foreign exchange strategist at Scotiabank. “Some people think that this move may be over, but I think there is still potential for further unwinding of some of these carry trades and some of the positioning.”

Osborne sees fair value for the yen at about 145 per dollar, and said "there is still some way to go before the yen short trade is fully unwound and possibly even reversed." Brad Bechtel, global head of foreign exchange at Jefferies in New York, believes further gains in the yen may be temporary as the currency is expected to continue to be affected by the wide U.S.-Japan interest rate differential.

If expectations for Bank of Japan tightening disappoint and late action by the Fed dampens views it will cut rates in September, the yen could easily fall sharply. That in turn could trigger market intervention by Japanese authorities, which have been implicated four times so far this year.

Japan's newly appointed top foreign exchange official Jun Mimura said ahead of the Bank of Japan's closely watched decision that the recent weakness of the yen is doing more harm than good to the Japanese economy. He mentioned measures such as market intervention to curb speculation that is pushing down the yen.

Mimura said that while the recent depreciation of the yen has both advantages and disadvantages, the disadvantages are becoming more and more obvious, and he pointed out that the impact of rising energy and food prices on consumers and importers is one of the disadvantages of the depreciation of the yen. He also said that after a comprehensive assessment from multiple angles, if it is really necessary to take action, they will do so. He mentioned an agreement reached by the Group of 20 that excessive volatility and disorderly flows of currencies will have a negative impact on economic and financial stability.

Mimura also hinted that he may continue his predecessor's strategy of keeping investors guessing when Japan will intervene to support the yen. "In some cases, predictability is important, and in other cases, unpredictability makes sense," he said.

Article forwarded from: Jinshi Data