On Friday (December 13), Japanese stocks opened lower with a gap down, and the Nikkei 225 index plunged nearly 500 points as a stronger dollar pushed the yen exchange rate close to 153. With the Bank of Japan's monetary policy meeting approaching, market expectations for a rate hike have been adjusted, and the return of arbitrage trading risks has become a focal point of market discussion.
Yen Under Pressure as Arbitrage Risks Rise
Recently, the yen has continued to weaken, primarily influenced by the strong dollar and the Bank of Japan's dovish policy. Analysts point out that if the Bank of Japan delays raising interest rates, the low-interest-rate environment may fuel a resurgence of carry trades, further depressing the yen's exchange rate. This situation has raised concerns among forex market strategists.
A forex strategist in Tokyo stated, "The Bank of Japan might keep rates unchanged until March next year or later, which will continue to pressure the yen and potentially trigger a large-scale return of carry trades.”
Market Expects Bank of Japan to Hold Steady
According to trader data, there is approximately a 74% probability that the Bank of Japan will keep interest rates unchanged at its monetary policy meeting on December 18-19. Goldman Sachs believes that the Bank of Japan still lacks sufficient confidence in the outlook, thus anticipating that this meeting will maintain the rate at 0.25%.
Additionally, sources from relevant departments indicate that even if the Bank of Japan delays rate hikes to January next year or later, it would not incur significant policy costs. The main reason is that inflation risks are currently low, and market concerns about future price trends have eased.
Foreign Investors Increase Holdings in Japanese Assets
Despite the yen's continued weakness, the Japanese stock market has still attracted significant attention from foreign investors. According to the latest data released by Japan Exchange Group, foreign investors had a net purchase of 556.2 billion yen in Japanese stocks and stock index futures in the week ending December 6, marking the highest level since November 8. This indicates a recovery in investor confidence in Japanese assets.
Uncertainty in Future Policy Direction
Currently, there is significant divergence in market views regarding the future policy direction of the Bank of Japan. Some analysts believe that if the yen continues to depreciate or inflation significantly exceeds expectations, the Bank of Japan may be forced to adjust rates earlier. However, more opinions tend to believe that the Bank of Japan will adopt a more cautious approach to avoid affecting economic recovery due to hasty policy shifts.
Overall, the yen exchange rate and the Bank of Japan's policy direction will become focal points for the market. Against the backdrop of major global central banks gradually tightening monetary policy, the Bank of Japan's actions may have a significant impact on the forex market.
