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On Wednesday (July 31), the Bank of Japan unexpectedly raised interest rates to the highest level since 2008 and said it may raise interest rates further. The yen hit a four-month high against the dollar on Wednesday. Valeria Bednarik, chief analyst at FXStreet, wrote an article on Wednesday to analyze the outlook for the yen after the Bank of Japan's rate hike.

Bednarik wrote on Wednesday that the Fed could "destroy" the Bank of Japan's plans. In the medium term, the narrowing of interest rate differentials will be beneficial to the yen. If the Fed and the Bank of Japan maintain their current policy paths, USD/JPY could fall further by 1,000 points.

Here are the main points of Bednarik's article:

The Bank of Japan finally woke up and unexpectedly raised its benchmark interest rate by 15 basis points to 0.15%-0.25%. Calling the result "surprising" might be a bit of an overstatement, as several Japanese media predicted the decision hours before it was implemented. As a result, the yen soared to 149.78 yen per dollar, the highest since mid-March.

Bank of Japan board members also outlined plans to halve their monthly bond purchases, finally bringing some firmer monetary tightening at a time when global central banks are moving in the opposite direction. Global central banks have implemented massive tightening in 2022 and pushed interest rates to record levels as a post-pandemic surge in inflation caught policymakers off guard. However, the Bank of Japan has maintained loose monetary policy, refusing to follow the trend as Japan has battled deflation for about 30 years.

However, times have finally changed. In June, Japan's consumer price index (CPI) rose 2.8% year-on-year, taking a toll on real incomes and household purchasing power. Bank of Japan policymakers must be very worried to make such a statement, which would probably seem conservative in any other country except Japan. Prices have risen faster than expected, but there was no comment from Bank of Japan board members.

At the very least, a rate hike would help narrow the interest rate gap between Japan and major peers and could lead to a stronger yen.

USD/JPY Technical Outlook

The USD/JPY pair hit a multi-year high of 161.94 as the yen continued to weaken. The pair rose to the above high from the 140.00 price range reached in December last year, and only began to fall in July as investors rushed to digest the expectation of interest rate cuts by the Federal Reserve.

The 61.8% Fibonacci retracement level of the 140.24/161.94 rally at 148.58 is a potential bearish target and key breakout point. Once below this level, the bears will confirm their control over USD/JPY and aim to retest the aforementioned 140.00 area.

Of course, this also depends on the Fed. If the Fed cuts rates in September while leaving room for another rate cut before the end of the year, the bearish case for USD/JPY will remain strong.

The opposite scenario would spell trouble for Bank of Japan officials as the yen could resume its slide, further hurting the wallets of Japanese households.

At 14:59 Beijing time on August 1, the USD/JPY exchange rate was 150.06.

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