The yen exchange rate jumped on Wednesday, with the Bank of Japan board member Junko Nakagawa implying that raising interest rates is still under consideration.

On Wednesday, September 11th, Bank of Japan board member Junko Nakagawa gave a speech, stating that

It is currently difficult to identify the specific level of neutral interest rates, and it will search for the neutral interest rate through evaluating the effect of raising interest rates.

the Bank of Japan will evaluate the impact of market volatility on the economic outlook. As long as the economy performs as expected, the Bank of Japan will continue to adjust monetary policy.

The impact of yen depreciation on costs does not fully reflect in prices.

The exchange rate has a greater impact on inflation than before.

Currently, traders are assessing the impact of the Bank of Japan's monetary policy and the US presidential debate on the foreign exchange market. The market is generally optimistic about the yen, and the yen against the US dollar has strengthened to its highest level since the beginning of the year.

The yen against the dollar has risen to 141, up nearly 1% intraday, erasing the year's decline. Since hitting a low of 161.95 on July 3, the yen has been in an upward trend, mainly due to expectations that the interest rate differential between the US and Japan will further narrow.

Meanwhile, the dollar has fallen against most G10 and Asian currencies, including the Philippine peso and Indonesian rupiah. This volatility comes as Harris and Trump engage in their first presidential debate.

OCBC Bank currency strategist Christopher Wong said,

"The yen is the main catalyst for the rise in Asian currencies, and as long as global economic growth remains moderate, the upward trend of Asian currencies can continue."

In addition to the foreign exchange market, other markets have also reacted to the Bank of Japan's monetary policy and the US presidential debate. With Japan's economy heavily reliant on exports, the rise of the yen has put pressure on the Japanese stock market, with the benchmark index reaching its lowest level in a month. Today, the Nikkei 225 index fell 1.5% to 35,619.77 points. The TOPIX index in Japan also declined by 1.8%.

Will the Bank of Japan raise interest rates in September?

While most analysts at the Bank of Japan expect interest rates to remain unchanged at next week's meeting, possibly taking action in December or January, Junzo Nakagawa's comments do suggest that if the economy and prices develop as expected, a rate hike is still on the agenda.

Hiroyuki Machida, Head of Foreign Exchange and Commodity Sales at ANZ Group Holdings, said that Junzo Nakagawa's positive comments on monetary policy normalization may have triggered some losses in positions that bet on the US Consumer Price Index data and a 25 basis points rate cut by the Fed in September.

However, the market does not believe that the Japanese yen will continue to rise.

Shusuke Yamada, Chief Japan Forex and Interest Rate Strategist at bank of america, stated in a report that the yen may resume its decline by the end of the year, and is expected to fall below 150 against the US dollar. This is because the current pricing in the forex market has overstated the potential for a rate cut by the Federal Reserve, and exaggerated the narrowing of the US dollar/yen interest rate differential, leading to the prospect of funds flowing back to Japan.

Since the 1990s, a rate cut by the Federal Reserve has not always been detrimental to the US dollar/yen exchange rate. The only significant decline in the US dollar/yen exchange rate occurred during the 2007-2008 cycle of rate cuts by the Federal Reserve, when the global financial crisis led to the unwinding of the yen carry trade, causing a sharp strengthening of the yen.

Market pricing in the currency market indicates an expectation of the Federal Reserve cutting interest rates by more than 100 basis points this year, while economists at bank of america expect the Federal Reserve to cut rates three times by 25 basis points each, a total of 75 basis points.

Although the recent cooling of the US labor market, the risk of a sustained decline in the bank of america balance sheet and an economic hard landing in the USA remains limited.

Editor/new