Last Thursday, the Japanese government carried out the third intervention of the year, estimated to have spent around 35 trillion yen (22 billion US dollars) to purchase Japanese yen. However, intervention alone is difficult to reverse the yen's decline, as the yen-to-dollar exchange rate increased by less than 2% last week.
At this point, pressure is once again on the Bank of Japan, with most analysts believing that more intervention may be needed to reverse the long-term downtrend of the yen.
It is widely expected in the market that at the interest rate decision to be held at the end of this month, the Bank of Japan may raise interest rates again, which would be the second rate hike since 2007.
Since the beginning of the year, the yen has depreciated by 11%, Japan's inflation pressure has soared, and the necessity of raising interest rates has been increasing. Investors are closely watching the CPI data to be released this Friday, with June's CPI expected to rise slightly to 2.9%, far exceeding the Bank of Japan's 2% target.
Yujiro Goto, head of foreign exchange strategy at Nomura Securities, said:
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If the yen continues to weaken before the July meeting, the Bank of Japan may need to consider raising interest rates earlier, even when deciding to reduce bond purchases.
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He believes that if the central bank raises interest rates by 15 basis points, it may push the yen-to-dollar exchange rate up by 2-3 yen, but raising interest rates alone may not be enough to reverse the exchange rate decline.
However, market expectations for the Bank of Japan's interest rate hike have somewhat diminished. According to the forward market data, the probability of a 10 basis point rate hike by the Bank of Japan in July has decreased from 59% to 51%.
Some analysts also warn that if the Bank of Japan raises interest rates in July, it may not announce a reduction in bond purchases at the same time.
The reason is that if the Bank of Japan announces a reduction in bond purchases while raising interest rates, its actions may be seen as driven by exchange rate fluctuations rather than fulfilling its mission of price stability, which could damage the central bank's credibility.
Barclays Bank predicts a 15 basis point interest rate hike by the Bank of Japan this month, but believes that the impact on the currency will be limited. Mitul Kotecha, head of Asia foreign exchange and emerging market macro strategy at the bank, said:
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While the weakening yen has raised expectations for the Bank of Japan to raise interest rates this month, we believe that the domestic and foreign yield differentials are too large to sustain a reversal (of the yen depreciation trend)
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Nomura Securities believes that if the Bank of Japan raises interest rates by 15 basis points in July, it may push the yen to dollar exchange rate up by 2-3 yen, but a rate hike alone may not be enough to reverse the downward trend in the exchange rate

Intervention can't save the yen, pressure on the Bank of Japan?