Bank of Japan account data shows no intervention in the foreign exchange market; yen's sharp fluctuations on Wednesday were actually due to rising expectations of a rate hike

According to the Zhihong Finance APP, data from the Bank of Japan shows that Tokyo did not make any significant interventions in the foreign exchange market on Wednesday, indicating that the sharp fluctuations in the exchange rate were likely due to the readjustment of interest rate expectations, causing nervousness among traders. The difference between the Bank of Japan's current account forecast released on Thursday and estimates from currency brokers was too small to signal large-scale yen purchases as seen a month ago.

The Bank of Japan forecasts that, due to fiscal factors, its current account will decrease by 410 billion yen, while according to the average estimates from Central Tanshi, Ueda Yagi Tanshi, and Tokyo Tanshi Research, the current account will decrease by about 700 billion yen. This discrepancy is far smaller than 729 billion yen—a level that marks the smallest scale of intervention by Japan since 2022.

The exchange rate volatility partly stems from traders adjusting their positions based on expectations for the Bank of Japan's interest rate trajectory. A series of statements by Japanese and US policymakers has strengthened market expectations that the Bank of Japan will raise interest rates in September, while also sparking speculation about a faster or even substantial rate hike afterwards.

According to informed sources, the Bank of Japan is inclined to raise rates by 25 basis points at its meeting in September. This news broke on Thursday but also threw cold water on the idea of a more significant rate hike.

On Wednesday, the US dollar-to-yen exchange rate once fell by more than 1 yen, a move that initially led to speculation the Japanese authorities might intervene again after a record-breaking operation a month ago. In the past, sharp yen movements of more than 2 yen were typically associated with concerns over the risk of intervention by Japan, rather than actual intervention activities.

Whenever Japanese monetary authorities intervene in the foreign exchange market, they normally attempt to reverse a 5% movement in the yen during the initial round, followed by smaller-scale actions. Around a month ago, Japan spent 15.4 trillion yen (approximately $98.5 billion) to intervene in the foreign exchange market, while the US also stepped in to support the yen for the first time in 28 years.