FX.co ★ The Bank of Japan Tries to Calm the Market

The Japanese government and the Bank of Japan are striving to present a united front and restore calm in the financial markets after the largest stock decline in three decades, and the strengthening of the yen, which prompted harsh criticism of the monetary policy and cast a shadow on efforts to encourage households to invest their assets.

"In the current situation, it is very important for us to maintain cool-headed judgment," Prime Minister Fumio Kishida told reporters during a visit to Hiroshima. "I will continue to monitor the situation with a sense of urgency, working closely with the Bank of Japan."

Officials appeared to be doing everything possible to verbally reassure observers after the Nikkei 225 posted its largest percentage drop since 'Black Monday' in 1987, while the yen surged to over 142 per dollar, having recently traded at 162. Many economists were quick to blame the regulator for the ill-considered decision to raise rates last week, contributing to the market turmoil seen in recent days. However, the government made it clear that its stance towards the Bank of Japan remains unchanged.

After the first trilateral meeting between the Bank of Japan, the Ministry of Finance, and the Financial Services Agency, currency chief Atsushi Mimura stated that the recent actions of the Bank of Japan were not even discussed. He added that their outlook on the path to economic recovery remains unchanged.

As noted by many experts, such trilateral meetings are often used to send specific signals to the market. In this case, the message seemed to be that the authorities are closely monitoring developments and affirming confidence in the regulator's actions.

Mimura also pointed out that some market experts associate the recent volatility with a sudden global aversion to risk, driven by concerns about slowing growth in overseas economies, including the U.S., and escalating geopolitical tensions in the Middle East. "Financial markets are influenced by various factors, and we as a government cannot definitively say what drives them," he said.

Meanwhile, Finance Minister Shunichi Suzuki also spoke to reporters, trying to reassure investors who had started investing in the government's tax-free investment program this year. Nevertheless, the government and the Bank of Japan are likely to continue facing intense scrutiny.

This week, the Bank of Japan Governor Kazuo Ueda is scheduled to speak at a parliamentary committee meeting. He will likely face sharp questions about the latest policy decision and discuss the regulator's future plans.

The sharp strengthening of the yen, which the Bank of Japan has recently sought, has proven to be quite strong and unpredictable, prompting many hedge funds to abandon their long positions on the dollar against the yen. Add to this the reduction in US interest rates planned for September, and you have an explanation for the current events. However, speculators are likely to take advantage of this weakness of the USD/JPY pair in an attempt to achieve a more substantial correction after the significant decline. We will also try to take advantage of this.

As for the current technical picture of USD/JPY, dollar buyers need to take the nearest resistance at 145.60. Only this will allow them to target 145.90, above which it will be quite difficult to break through. The furthest target will be the 146.30 area, after which a sharper upward spike to 146.70 can be expected. In case of a decline, the bears will try to regain control at 149.95. If they succeed, breaking this range will deal a serious blow to the bulls' positions and push USD/JPY down to the 144.40 low with the prospect of reaching 143.69.