Written by Ray Wee
SINGAPORE (Reuters) – The yen swung between gains and losses on Wednesday after the Bank of Japan raised interest rates at the end of its two-day policy meeting and unveiled a detailed plan to scale back its massive bond-buying programme.
The yen rose about 0.8% to a more than three-month high of 151.58 yen per dollar immediately after the BOJ’s announcement, but it reversed those gains sharply within minutes as the outcome was largely expected.
The Japanese currency fell slightly to 152.79 against the dollar.
The Bank of Japan said its board decided to raise the overnight lending rate target to 0.25% from 0-0.1% in a 7-2 vote and decided on a quantitative easing plan that would roughly halve monthly bond purchases to 3 trillion yen ($19.63 billion) from the current 6 trillion yen from January to March 2026.
“Ahead of the meeting itself, the market was already set for a bit of a hawkish outlook,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.
“You could say the decision was generally hawkish in the sense that there was actually a rate hike, but that was balanced, to some extent, by less quantitative tightening than expected.”
Various news reports had earlier indicated that the Bank of Japan might raise interest rates on Wednesday, setting the market up for such a move.
The yen looks set to end July with gains of more than 5%, helped by bouts of intervention from Tokyo and the unwinding of short-term yen positions ahead of the Bank of Japan decision.
Wednesday is expected to be a busy day as investors will also get inflation figures from France and the wider eurozone later in the day, along with a policy decision from the US Federal Reserve, which takes centre stage.
The spread of geopolitical violence also kept markets on edge.
The Australian dollar fell to its lowest since May after core inflation surprised markets with a fall, significantly reducing the risk of another interest rate hike.
Sterling fell 0.68% to $0.6494, after falling more than 0.8% to a three-month low of $0.64825 after the CPI data. That left the currency on track for a monthly loss of more than 2%.
Markets have abandoned bets on another rate hike by the Reserve Bank of Australia and are now betting on monetary policy easing as early as November. The RBA holds its monetary policy meeting next week.
“If the RBA needs a smoking gun to tip the scales for a rate hike next week, this quarterly CPI reading, while certainly not to the RBA’s liking, is not enough to convince them to raise rates by 25bp next week,” said Chris Weston, head of research at Pepperstone.
In Asia, an official survey of Chinese manufacturing showed industrial activity contracted for a third straight month in July, keeping expectations alive that Beijing will need to do more to shore up its fragile economic recovery.
In contrast, the yuan rose in the latest trading by 0.2% to 7.2374 against the dollar.
Preparing for the Fed
The euro rose 0.08% to $1.0824 and was on track for a 1% gain in July, helped by a weaker dollar.
The euro zone economy grew slightly more than expected in the three months to June, data showed on Tuesday, but the outlook for the rest of the year was not quite as rosy.
Sterling rose 0.06% to $1.28445 and is on track for a monthly gain of 1.6%. The New Zealand dollar rose 0.02% to $0.5904, although it was on track to fall 3% on the month.
Traders were also eagerly awaiting the Federal Reserve’s interest rate decision, which is likely to be the next major catalyst for broader currency moves after the Bank of Japan’s decision. Markets expect the U.S. central bank to lay the groundwork for a rate cut in September.
Markets are expecting the Fed’s rate-easing cycle to begin in September, with around 68 basis points of cuts priced in for the rest of the year.
The Australian dollar index fell 0.04% to 104.39 and was expected to record a monthly loss of about 1.4%.
“We expect the Fed to open the door to a first rate cut in September. In our view, such a move today could send the wrong signal to markets and could unsettle investors,” said Julien Lafarge, chief market strategist at Barclays Private Bank.
“On the other hand, with markets already pricing in a September rate cut of just over 25 basis points, the Fed may find it difficult to resist these expectations.”
(1 dollar = 152.7900 yen)