On Thursday's early trading session, the sentiment in the Asia-Pacific market deteriorated due to investors withdrawing from the artificial intelligence boom. The risk-off sentiment was triggered by the significant drop in the US stock market. At the same time, the continuous appreciation of the Japanese yen for the fourth consecutive day seriously affected the performance of the Japanese stock market before the Bank of Japan meeting next week.

Driven by risk-off sentiment and speculation of a possible rate hike by the Bank of Japan, the Japanese yen has significantly strengthened against other G10 and Asian currencies. As of press time, the Japanese yen has appreciated, with the USD/JPY falling 0.68% to 152.85, the EUR/JPY falling 0.65% to 165.72, and the GBP/JPY falling 0.74% to 197.09. The overnight implied volatility of USD/JPY has risen to over a one-month high, reaching 14.325%; the one-week implied volatility has surged to 14.015%, and the two-week implied volatility has risen to 11.99%, all of which are the highest levels since May 3.

Both the Japanese and South Korean stock markets fell by more than 2%. The Nikkei 225 index fell 2.97% and lost the key level of 38,000 points, falling 10% from the July high and entering a technical correction range. The FTSE China A50 index futures fell 1%.

Spot gold fell below $2370 per ounce, down 1.14% intraday. Spot silver has seen a constant increase in short-term decline, and has now fallen below the key level of 28, down more than 3%.

Matt Simpson, a market analyst at FOREX.com and City Index, stated in a commentary article that following the disappointing performance of large technology companies, Wall Street ushered in another sell-off. Simpson said that some people speculated that the Bank of Japan might raise interest rates next week. Earlier, some media reported that the Bank of Japan is considering raising interest rates by 10 basis points next week and will announce a detailed plan to halve the scale of bond purchases over the next few years.

As more and more people expected the eventual narrowing of the interest rate differential between Japan and the United States, the sign of a turning point for the Japanese yen becomes increasingly obvious. The USD/JPY exchange rate has reached its strongest level since May, reflecting the closure of carry trades. In the past two weeks, the USD/JPY exchange rate has rebounded more than 5% from its lowest level since the 1980s. The obvious intervention measures taken by Japan to support the yen, the closure of global interest rate arbitrage trades, and the hedge funds reducing their bets on the currency have all stimulated the appreciation of the yen.

Wei Liang Chang, a macro strategy analyst at DBS Bank Ltd., said, "As the risk-off sentiment intensifies due to the sell-off of technology stocks, and the speculative short position remains significant, arbitrage trading closure has driven the trend of the Japanese yen. With the possibility of Japan's monetary policy tightening next week, the anxiety of yen put options is increasing, which is in stark contrast to the upcoming interest rate cuts by the Federal Reserve and the European Central Bank. The possibility of further strengthening of the Japanese yen cannot be ignored before the Bank of Japan meeting next week."

Whether the sharp rise of the Japanese yen that is currently disrupting the market will be a turning point may depend on the decisions of the Bank of Japan and the Federal Reserve next week.

About 90% of the Bank of Japan observers believe that the Bank of Japan may raise interest rates on July 31, even if it is not their basic assumption. The Federal Reserve is also facing increasing calls to start cutting interest rates on the same day.

Kit Juckes, chief foreign exchange strategist at Societe Generale, said, "As volatility increases, holding costs increase. Therefore, shorts have the motivation to unwind their positions." The latest batch of data from the US Commodity Futures Trading Commission shows that leveraged funds cut their net short positions in the yen during the week ending on July 16 by the largest margin since March 2011. Asset management companies have also reduced their bets on the yen by the largest amount in a year.

Andreas Koenig, Global Head of FX at Amundi SA in London, said, "We believe that the yen will become more attractive, so we have reduced our short positions. We have recently seen intervention in the yen, so the uncertainty of holding short positions in the yen is increasing." He said last week in an interview, "We also believe that the United States may soon launch an easing cycle, which may weaken the US dollar."

At present, safe-haven funds are pouring into the Japanese yen. However, historically, the appreciation of the Japanese yen is positively correlated with gold, indicating that gold may also benefit from it.

According to Konstantin Oldenburger, market analyst at CMC Markets, the correlation between the yen and gold prices has returned, and the appreciation of the yen may be very beneficial for gold. He said that as the Federal Reserve may change its monetary policy, intervention by Japanese authorities may become easier in the future. He said that during periods of rising or persistently high interest rates, US stocks are particularly beneficial because liquidity returns to the US dollar. However, when interest rates fall, this liquidity flows out of the US dollar and into other investment opportunities around the world. The yen can now benefit from this redistribution.

The analyst added, "Hedge funds currently hold very little long yen positions, only short positions that need to be covered if short squeeze occurs. If the yen continues to rise, hedge funds may face greater selling pressure."

He pointed out that gold has been trading between $2,431 and $2,290 per ounce in the past three months. "Since early July, investors have been trying to break through this range, which could push prices up to $2,700. Conversely, if gold falls below $2,290, it could further correct to $2,220 and $2,189."