On August 1st, Fidelity International Asia economic analyst Liu Peigan stated that given Japan's overall economic structure remains intact, he maintains a neutral view on the Japanese yen. The Bank of Japan is steadfastly moving towards policy normalization, but a significant rebound in the yen would require a more accommodative monetary policy from the Federal Reserve. The Bank of Japan announced two important decisions at yesterday's monetary policy meeting, including raising the policy interest rate from 0% to 0.1% to around 0.25%, and gradually reducing the details of purchasing Japanese government bonds, with the aim of reducing monthly bond purchases to 3 trillion yen by March 2026. Liu Peigan stated that the Bank of Japan believes that overall corporate salary increases are spreading, leading to a more hawkish guidance for the future. The July outlook report also shows inflation forecasts above the 2% target for fiscal years 2024 and 2025, implying that the Bank of Japan has further room to raise interest rates. While domestic consumption recovery in Japan remains weak, controlling inflation remains the Bank of Japan's top priority, emphasizing that the real interest rate remains negative after interest rate adjustments, and loose financial conditions should support economic activity. At the same time, the recent weakness in the yen and the rise in import prices have also raised some concerns, so Fidelity believes that the future direction of the yen is also a major consideration for further policy tightening before imported inflation subsides. One of the resolutions at the meeting is to reduce the monthly purchase plan for Japanese government bonds. The Bank of Japan announced a gradual reduction in bond purchases, from the current 5.7 trillion yen per month to 2.9 trillion yen per month by March 2026. The Bank of Japan also retains flexibility and plans to conduct a midterm assessment in 2025, with the possibility of further increasing monthly bond purchases if yields suddenly rise. Given that the Bank of Japan will consider economic data dynamically and raise medium-term inflation forecasts, Fidelity believes there is a possibility of further interest rate hikes. The pace and scale of tightening policy may depend on potential inflation trends and the import price pressures brought about by the weakening yen. A virtuous cycle of wage and commodity price increases is expected to continue, meaning that Japan's neutral interest rate will reach higher levels. If wage growth momentum continues, the Bank of Japan may need to further raise policy rates to achieve the 2% price stability target. Although the weak yen brings greater upward pressure on import prices, the policy path of the Federal Reserve remains a key driver of the levels of the US dollar and the yen. If the yield spread widens again, it may prompt the Bank of Japan to accelerate its tightening pace.