On Wednesday (July 31), the Bank of Japan announced its second interest rate hike since 2007, a result released before the Federal Reserve's decision to raise interest rates, causing a short-term surge in the Japanese yen. Earlier economic data from major Asian countries showed that manufacturing activity contracted for three consecutive months. Next, market attention will shift to the outcome of the Federal Reserve's interest rate hike.

Japan announces interest rate hike

Today's decision by the Bank of Japan is the highlight of a day full of events in Asia. Before the central bank's decision was announced, the Japanese stock market reduced its decline and the yen erased its gains. Subsequently, around 12:00 Hong Kong time, the Bank of Japan announced an increase in benchmark interest rates and a plan to reduce bond purchases, highlighting its determination to normalize its policies.

According to Wednesday's statement, the Bank of Japan has raised its policy interest rate from the range of 0-0.1% to around 0.25%. The Bank of Japan also stated that it will reduce the monthly bond purchase rate to approximately 3 trillion yen ($19.6 billion) in the first quarter of 2026. The recent purchasing speed is about twice that number.

Analysts originally expected a larger downward adjustment. The Nikkei 225 index has remained almost unchanged, while the Japanese yen oscillates between rising and falling.

Bank of Japan Governor Kazuo Ueda's adoption of these measures indicates his willingness to continue promoting the normalization of monetary policy. For many years, the Bank of Japan has been pursuing an ultra loose policy, including implementing the world's last negative interest rate before March this year. Wednesday's action may trigger market speculation that there may be another interest rate hike this year.

A few hours before the upcoming meeting of the Federal Reserve, the hawkish stance of Kazuo Ueda may mean a turning point for the troubled yen, as traders expect the US Japan interest rate gap to narrow. Any suggestion by the Federal Reserve that there may be a rate cut in September will support this statement.

By reducing its bond buying program, the Bank of Japan is embarking on a path of quantitative tightening. Previously, long-term asset purchases led the Bank of Japan to hold over half of Japan's outstanding bonds, with 10-year and shorter term bonds even accounting for a larger proportion in the market.

Prior to the announcement of the Bank of Japan's decision, public broadcaster NHK reported that members of the Bank of Japan's board of directors will discuss raising interest rates from the current range of 0 to 0.1% to around 0.25% on Wednesday.

Given the close relationship between the Japanese yen and the Nikkei index, not to mention Japan's significant impact on global financial flows, today's meeting could become an important source of volatility, "Capital said Com senior market analyst Kyle Rodda said.

Given the position of the Japanese yen as the primary arbitrage currency, this decision will ripple through global financial markets. As traders wait for Bank of Japan Governor Kazuo Ueda to provide details, stock markets in other parts of Asia are experiencing significant volatility due to a series of economic data, key corporate financial reports, and positions before the Federal Reserve's decision.

Why did the Australian dollar plummet?

After the unexpected slowdown in core inflation rate in the previous quarter, the Australian dollar fell and short-term bonds rose, prompting traders to increase their bets on the Reserve Bank of Australia cutting interest rates.

The yield on Australian three-year government bonds fell by as much as 23 basis points, marking the largest daily decline since December 14th.

The decline of the Australian dollar is completely logical - the market now believes that the Reserve Bank of Australia can indeed be closer to other central banks in terms of policy rates, "said Tim Baker, strategist at Deutsche Bank.

The market is also preparing for the Federal Reserve's decision, and it is expected that Chairman Jerome Powell may hint at a potential rate cut in September later on Wednesday.

In other aspects, the Kospi index in South Korea rose as Samsung Electronics' stock price rose after its report showed the fastest profit growth rate since 2010. Although the data showed that factory activity in major Asian countries shrank for the third consecutive month in July, the stock markets in Chinese Mainland and Hong Kong still rose. More signs of slowing growth prompted investors to bet that the government would introduce stronger support measures.

Microsoft hits tech stocks hard

In the United States, the world's largest technology company continued its post market decline after Microsoft's financial report sparked concerns that the artificial intelligence craze may be overdone. The rotation of large tech stocks caused the Nasdaq 100 index to fall 9% from its historical high, approaching a correction.

On Tuesday, the S&P 500 index fell to around 5435 points. The Nasdaq 100 index fell 1.4%. The indicators of the "Big Seven" super large cap stocks fell by 2%. The Russell 2000 Index for small businesses rose by 0.3%. Nvidia fell 7% and its market value evaporated by $193 billion.

If the Federal Reserve is about to start its interest rate cut cycle, stock bulls have historical data support. In the previous six interest rate hike cycles, according to calculations by financial research firm CFRA, the S&P 500 index rose an average of 5% within one year after the first rate cut. More importantly, the gains have also expanded, with the small cap Russell 2000 index rising 3.2% after 12 months.

In other aspects, after falling in the previous four trading days, US bond yields have stabilized. The US dollar index fell slightly.

In terms of commodities, oil prices have risen for the first time after four consecutive trading days of decline, as industry reports show that US crude oil inventories have fallen for the fifth consecutive week.