With the increased impact of the uncertainty of the Bank of Japan's next policy steps due to the low summer liquidity, the recent volatility of the Japanese yen will further increase.

The spread between the buying and selling prices of the USD/JPY exchange rate outside the Tokyo trading session has recently widened and is converging with the buying and selling prices during the onshore trading session. The actual volatility of the currency reached its highest level in two months due to the risk of Japan's central bank raising interest rates stimulating unwind carry trades.

Christopher Wong, a forex strategist at Oversea-Chinese Banking Corp in Singapore, said that the "part of the reason for the reduction in market liquidity is summer vacation and next week's Bank of Japan meeting."

"Recently, a large number of yen shorts closing positions caught the market off guard. This may mean that the price of the USD/JPY will fluctuate," he said.

The liquidity of the yen offshore is decreasing.

Tokyo's inflation accelerated for the third straight month in July, opening the door to the possibility of the central bank raising interest rates at its policy committee meeting next week.

The Ministry of Internal Affairs reported on Friday that consumer prices excluding fresh food in Tokyo rose 2.2 percent, up from 2.1 percent in June. The reading was in line with expectations. Energy prices drove the increase, with electricity prices up 19.7 percent YoY. Tokyo's data is a leading indicator of national data for August. BOJ officials will examine this data closely as they continue to look for opportunities to normalize policy after years of aggressive easing. The day before the data was released, there was data showing that Japanese corporate service prices in June recorded their biggest increase in about 33 years.

At the same time, Yoshiki Shinke, senior executive economist at the Dai-Ichi Life Research Institute, believes that Friday's data suggests that companies are trying to pass on higher costs to customers due to weak consumer spending.

"The Bank of Japan's policy decision next week may or may not raise interest rates," said Shinke. "Today's data is not disappointing, but it will not be a factor that makes them more confident in the inflation trend. If it were up to me, I would wait to see more data."

The Bank of Japan will also announce the details of its plan to reduce bond purchases at the end of its two-day policy meeting on July 31st. In addition to providing a detailed outline of its bond operation plan, the central bank will also update its inflation and economic growth forecasts at the meeting. Currently, it expects that the core price index will remain above its 2% target for the year ending in March next year and then fall below that level in the next fiscal year. Recently released data reportedly showed that weak consumer spending made the decision whether Japan's central bank would raise interest rates more complex.

Taro Kimura, a Bloomberg economist, said, "Tokyo's core inflation accelerated in July, providing strong support for the Bank of Japan's expected interest rate hike at next week's meeting, as we have been predicting. The recent reduction in utility subsidies pushed up this data."