Bank of Japan

Japan likely used around $34 billion intervening in the currency market to support the yen on Friday, building on the previous day's actions in coordination with the US, a Bloomberg analysis of central bank accounts indicates. The operation was estimated at around ¥5.33 trillion based on a comparison of Bank of Japan accounts released Monday and money brokers' forecasts, which would set a new monthly record for the total used in the latest round of intervention. Finance Minister Satsuki Katayama confirmed earlier in the day that Japan stepped into the market on Friday. The sustained yen-buying underscores authorities' resolve to push back against speculators after the yen slipped last month to its weakest level against the dollar in four decades. The US Treasury Department joined the effort last week, signaling the closest coordination on currency policy in 15 years, though the analysis does not reveal the size of the US intervention.

The Bank of Japan is highly likely to maintain its current monetary policy at its two-day policy board meeting on July 30 and 31. The central bank just raised its policy rate to 1 percent in June, the highest level in about 31 years, and has determined that it needs to assess the effects of the rate hike for the time being. At the meeting, the BOJ will compile its latest outlook report and discuss an upward revision to its growth forecast for fiscal 2026, currently at 0.5 percent, given that downside risks to the economy are receding due to progress in alternative energy procurement despite lingering uncertainty over the Middle East situation, and in light of robust AI-related demand.

Global bonds are being pummeled by a resurgence in energy prices, with the average yield on the Bloomberg Global Treasury Index surging to 3.68%, the highest since the 2008 global financial crisis. Benchmark UK gilt yields have closed above 5% for the longest stretch in almost two decades, Germany's 10-year yield is at its highest since 2011, and Japanese yields are near levels last seen in the 1990s. The selloff comes ahead of key central bank decisions next week from the Federal Reserve, Bank of Japan, and Bank of England, with oil prices climbing above $100 a barrel on Thursday. Traders are also grappling with new Fed Chairman Kevin Warsh's reduced forward guidance, which has raised the market-implied probability of a rate hike at the July meeting to one-in-three. The pressure on bonds has pushed the iShares 20+ Year Treasury Bond ETF down almost 5% over the past month, and it has now lost more than half its value since 2020.

The Bank of Japan's climate change operation conducted on the 17th saw usage reach 13.9812 trillion yen, the highest since the first operation in December 2021. Usage has surged since the middle of last year, and with this increase, annual fund supply has swelled to around 25 trillion yen. The appeal lies in the ability to raise one-year funds at a low rate of 1%, the same level as the policy rate, and regional banks in particular are increasingly using it as a means to diversify funding in preparation for rising loan-to-deposit ratios and future difficulties in attracting deposits. The BOJ is taking a wait-and-see stance, noting that climate-related lending and investment results are steadily growing, but some voices are calling for verification of the contradiction of large-scale fund supply during a monetary normalization phase and whether the effects align with the program's original purpose.

The Bank of Japan has an increasingly strong case to consider an early rate hike as business activity remains robust and the tumbling yen threatens to spur inflation above its price target. Markets now price a solid chance—over 60%—that another increase could come by October, sooner than the December move economists had generally expected. The central bank's Tankan survey showed business confidence improving in June to the highest in eight years, and firms' longer-term inflation expectations rose to a record 2.6%. Prime Minister Sanae Takaichi's signaling of a preference for prolonged monetary easing has helped push the yen to its weakest against the dollar since 1986, adding to inflationary pressure and increasing the likelihood the BOJ will need to raise rates sooner.

Asian equity markets diverged sharply on Thursday as bumper earnings from Micron Technology sparked a massive chip rally, lifting tech hubs in Tokyo and Seoul. Japan's Nikkei rose 4.49% to above 70,000, while the broader Topix Index added 0.7% to 3,992, following a hawkish speech by Bank of Japan board member Naoki Tamura who said the central bank should hike rates every few months toward a neutral 2%. South Korea's KOSPI surged nearly 5% to hover around 8,880. In contrast, Hong Kong's Hang Seng Index fell 1.44% to 23,106 and Australia's ASX 200 slipped 0.43% to 8,773. U.S. stock futures pointed to a tech-driven recovery, with Nasdaq 100 futures up 1.83%.