On Thursday morning (July 25th) in the Asian market, the USD/JPY fluctuated at a low level and is currently trading around 153.73. The US dollar hit a more than two and a half month low against the Japanese yen on Wednesday, as investors prepared for hawkish monetary policy officials to tighten their policies by closing out spread trades short of the yen before the central bank meeting next Sunday.

The yen against the euro has also risen to its highest level since mid May, and the market expects the yield spread that makes it costly for foreign investors to hold yen securities to narrow.

The US dollar index fell 0.08% to 104.35 on Wednesday, narrowing its decline slightly after S&P Global released the US July Composite Purchasing Managers' Index (PMI). The US composite PMI tracking the manufacturing and service industries rose to 55.0, the highest since April 2022.

Helen Given, Deputy Head of Trading at Monex USA, stated, "We are only focusing on concerns about global economic growth, and we will observe for the rest of this week whether these concerns will persist and whether the situation in the United States will be different." She emphasized that China's unexpected interest rate cut this week was a catalyst for these concerns.

She continued, "The latest released US PMI is quite positive, but not particularly outstanding

The main macro news of this week is the release of the initial value of the US second quarter gross domestic product (GDP) on Thursday, as well as the release of the personal consumption expenditure (PCE) price index on Friday, which is the inflation indicator favored by the Federal Reserve.

Sources say that the Bank of Japan may debate whether to raise interest rates at its meeting next week and announce a plan to roughly halve bond purchases in the coming years, indicating the bank's determination to steadily lift its massive monetary stimulus policy.

Four people familiar with the Bank of Japan's thinking said that the interest rate decision will depend on how long committee members plan to wait to observe whether consumption will recover and stabilize inflation around the bank's 2% target.

More than three-quarters of the surveyed economists expect the Bank of Japan to remain inactive this month, with the next action possibly in September or October, but insiders say the outcome of the July 30-31 meeting is less certain.

One of the sources said, "Given the uncertainty of the consumer outlook, this decision will be evenly matched and difficult to make." Another source said, "It is indeed a subjective judgment whether to take action now or later this year

They said that although the nine member committee generally believes it is necessary to raise interest rates in the near future, there is no consensus on whether to raise rates next week or later this year.

The core inflation rate reached 2.6% in June, exceeding the target of the Bank of Japan for over two years, and the basic wage increase for workers in May reached its highest level in 30 years, which is enough to make hawks believe that the current conditions are suitable for raising interest rates.

According to sources, there is uncertainty about the outcome of next week's meeting, partly due to the Bank of Japan's belief that there is no convincing reason to rush to raise interest rates. Currently, price increases remain moderate, and inflation expectations remain stable around 2%.

It is obvious that the Bank of Japan is likely to raise interest rates in the coming months. It is only a matter of time, "said one person." For the Bank of Japan, there is still a long way to go. Even if there is another interest rate hike, Japan's monetary situation is still very loose, "the second source said, and two other sources expressed the same view.

Although many market participants expect the Bank of Japan to raise interest rates this year. The Bank of Japan will develop a detailed plan at its policy meeting on July 30-31 on how to slow down its massive bond purchases and reduce its $5 trillion balance sheet.

Sources say that the Bank of Japan may gradually reduce its bond purchases in stages, at a pace roughly consistent with mainstream market views, to avoid an unwelcome surge in yields.

This increases the possibility that the Bank of Japan will roughly halve its monthly bond purchases within one and a half to two years - a pace advocated by a considerable number of participants at last week's central bank and financial institution meeting.

The Federal Reserve will also hold a meeting on the same day. Although few expect the Federal Reserve to start cutting interest rates this month, given the decline in inflation and slowing economic growth over the past few months, the Fed is likely to send a stronger signal of a rate cut in September.

The risk of Japan's interest rate hike and recent suspected foreign exchange market interventions have led speculators to liquidate previously profitable "spread trades" using the Japanese yen as the financing currency.

Since July, the Japanese yen has been the best performing currency in the Group of Ten (G10) countries.

The US dollar fell 1.07% against the Japanese yen on Wednesday, hitting its lowest level since May 6th at 153.10 yen during trading and closing at 153.84 yen. The euro fell 1.16% against the Japanese yen on Wednesday, hitting 166.13 yen at one point, the lowest level since May 8th.

Brian Daingerfield, a foreign exchange strategist at National Westminster Capital Markets Bank, said, "Even if the statement issued by the Bank of Japan is not as hawkish as the market now expects, if this happens, the Japanese Ministry of Finance may still intervene to prevent the yen from weakening. Of course, another reality is that the Federal Reserve seems to be approaching the start of an easing cycle