In recent weeks, investors have been placing bets on the yen, expecting interest rate changes to have a positive impact on the Japanese economy. However, they will face a critical moment as early as next Wednesday when the Bank of Japan's policy decision will have a significant impact on the trend of the yen.

Since July 11th, the yen has cumulatively risen by about 5% against the US dollar. Data shows that the yen-dollar exchange rate has risen above the 153 mark for the first time since May 6th, and has risen for four consecutive trading days, outperforming all other currencies in the G10. However, after stronger-than-expected economic growth data was released in the US overnight, the yen quickly gave up its gains, showing the fragility of its rise. The forward market data shows that there is a 38% chance that the Bank of Japan will raise interest rates by 15 basis points at the end of the July 31st policy meeting, reflecting the market's cautious expectations for the central bank.

A survey shows that only 30% of Bank of Japan observers predict that the central bank will raise interest rates, even though more than 90% think there is a danger of raising rates. This uncertainty makes the position of yen bulls particularly vulnerable, especially if the Bank of Japan fails to meet the market's expectations of a significant reduction in bond-buying scale, or if the Fed's later action weakens expectations of lower interest rates in the US over the next few months.

"This is a crazy yen rebound," said Nick Twidale, who has 25 years of experience trading the yen at ATFX Global Markets. "If the Bank of Japan fails to play its role in tightening policy, it could disappoint the market."

Twidale warned that if the Bank of Japan's measures fail to meet market expectations, arbitrage trades that previously suppressed the yen exchange rate may become active again. Meanwhile, market participants from BlackRock to former central bank officials predict that the Bank of Japan will keep interest rates unchanged for a longer period of time.

Unbalanced economic data has also added complexity to the Bank of Japan's decision-making. While key indicators measuring Japan's service sector strength rebounded in July, factory activity indicators showed contraction. In addition, weak consumer spending may make the Bank of Japan's decision next week more difficult.

"If the Bank of Japan does not take any action, the USD/JPY exchange rate may soar again," said Amir Anvarzadeh, a strategist at Asymmetric Advisors with over 30 years of tracking experience in the Japanese market."

On Friday, the yen exchange rate fluctuated slightly. At 10:15 am Tokyo time, the yen-dollar exchange rate remained basically flat at 153.96, and the previously released inflation data showed that consumer prices had risen for the third consecutive month. According to the Japanese Ministry of Internal Affairs and Communications, consumer prices in Tokyo, excluding fresh food, rose 2.2% on Friday, higher than the 2.1% in June, in line with widespread expectations. The rise was driven by energy prices, with electricity prices rising 19.7% YoY. The increase in processed food prices slowed slightly. As the lodging subsidy was gradually cancelled a year ago, the rate of increase in hotel prices also slowed down.

Nathan Swami, Citigroup's Forex Trading Director in Singapore, believes that after the significant volatility in the yen this week, the demand for call yen options may increase. However, he points out that it is too early to tell whether this indicates a long-term shift in investor sentiment, and that it is more likely a strategic shift in short-term positions or hedging activities.

Other traders said that because they are uncertain about how much the yen will appreciate before next week's Bank of Japan policy meeting, some hedge funds are still adopting a wait-and-see attitude. Rodrigo Catril of National Australia Bank Limited predicted that if the Bank of Japan does not fully meet market expectations, the yen-dollar exchange rate may fall to the 158 level.

However, even if the Bank of Japan does tighten its policy next Wednesday, the yen may still be favored by arbitrage trades. After the rate hike, the yen's implied yield will still be about 90 basis points lower than the Swiss franc, which is used as funding currency in arbitrage trades.

US interest rate risks should not be ignored either. If the possibility of a Fed rate cut decreases, Japanese currencies may be hit again. Charu Chanana, head of currency strategy at Saxo Capital Markets, said,"If the Fed does not suggest a rate cut in September and US data starts to strengthen again, the yen may test 160."

Editor/ping