BOJ Raises Rates

On July 31, the Bank of Japan raised its interest rate from approximately 0.1% to about 0.25%. The market widely expected the Bank of Japan to maintain the rate at 0.1%. Additionally, the Bank of Japan announced plans to reduce its purchases of Japanese Government Bonds (JGBs), but the reduction was less than the market had anticipated, falling short of the expected decrease of approximately 1 trillion yen per quarter.

According to the "Monetary Policy Operations Guideline Change and Japanese Government Bond Purchase Reduction Plan Decision," "The Bank of Japan has unanimously decided to reduce its monthly direct purchases of JGBs by approximately 3 trillion yen from January to March 2026, with a quarterly reduction of about 400 billion yen in principle."

StoneX market analyst David Scutt stated, "The Bank of Japan has taken a moderate approach to the pace of QQE reduction, essentially acknowledging that it will continue to buy indefinitely."

Yen Depreciation & Japan Economy

The Bank of Japan's plan to reduce JGB purchases may impact the Japanese economy and future monetary policy decisions. The reaction of the USD/JPY to monetary policy decisions suggests that the Bank of Japan's actions did not meet market expectations.

The depreciation of the yen has led to increased import costs, affecting household spending and the Japanese economy. The weakness of the yen may continue to negatively impact households and the Japanese economy.

In July, the Japanese government revised its 2025 fiscal year growth forecast down from 1.3% to 0.9%. The government also reiterated its concerns about the weak yen and stated, "We cannot ignore the impact of yen weakness and price increases on household purchasing power," said a member of the private sector committee during discussions on the new growth forecast.

USD/JPY Reaction

Before the release of the Bank of Japan's monetary policy decision and outlook report, USD/JPY dropped to a low of 152.103, then rose to a high of 153.345.

After the announcement of the Bank of Japan's monetary policy decision, USD/JPY surged to a high of 153.886 before pulling back slightly.

On July 31, USD/JPY increased by 0.08% to 152.868.

Dynamic Attention

Later on July 31, the FOMC interest rate decision and press conference will attract investor attention. Economists expect the Federal Reserve to keep rates unchanged at 5.50%, making the press conference a focal point.

Federal Reserve Chairman Powell’s support for rate cuts in September and December will influence USD demand. While investors anticipate a rate cut in September, uncertainty remains regarding the Federal Reserve's policy goals for Q4 2024.