Japanese Yen volatile after raising interest rates

The yen fluctuated on Wednesday after the Bank of Japan concluded its two-day monetary policy meeting by raising interest rates and unveiling a detailed plan to taper its extensive bond-buying program.

The yen surged up to 0.8%, reaching a three-month high of 151.58 per dollar immediately following the BOJ announcement. However, it quickly reversed those gains within minutes, as the outcome had been somewhat anticipated. The Japanese yen was last seen trading slightly lower at 150.65 per dollar.

The Bank of Japan announced that its board voted 7-2 to raise the overnight call rate target to 0.25% from the previous range of 0-0.1%. Additionally, the BOJ unveiled a quantitative tightening plan, which will reduce monthly bond purchases to 3 trillion yen from the current 6 trillion yen, starting from January-March 2026.

Earlier news reports had indicated the possibility of a rate hike from the Bank of Japan on Wednesday, preparing the market for such an outcome.

The yen appeared poised to finish July with a gain of over 5%, bolstered by Tokyo's intermittent interventions and the unwinding of short-yen carry trades ahead of the BOJ decision.

Wednesday was set to be a busy day, with investors awaiting inflation figures from France and the broader eurozone bloc, alongside a key policy decision from the U.S. Federal Reserve, which will take center stage.

Escalating geopolitical violence continued to keep markets on edge. In Australia, the dollar fell to its lowest level since May after core inflation unexpectedly declined, significantly reducing the likelihood of another rate hike.

The Australian dollar was last down 0.68% at $0.6494, having dropped over 0.8% to a three-month low of $0.64825 following the Consumer Price Index data. This put the currency on track for a monthly loss of more than 2%.

Markets have moved away from expectations of another rate hike from the RBA and are now anticipating a potential rate cut as soon as November. The RBA is scheduled to hold its policy meeting next week.

Elsewhere in Asia, an official factory survey revealed that China's manufacturing activity contracted for a third consecutive month in July, fueling expectations that Beijing will need to take additional measures to support its fragile economic recovery.

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