Consumer inflation in June accelerated but remains below the Bank of Japan's target for the fifth consecutive month. The core index showed 1.6% year-on-year, the second core index was slightly above 1.7% year-on-year, and the overall index was also at 1.7%.

Two factors have come into play here: the rising cost of energy due to the war, combined with the weakening yen, which makes imports even more expensive. Japan is one of the most vulnerable countries to supply disruptions from the Persian Gulf region, with over 90% of its oil imports coming from this area. The war, which has effectively blocked the Strait of Hormuz, has put the Japanese economy in a difficult position. If the conflict prolongs, Japan faces falling real household incomes, a physical shortage of raw materials, and, as a consequence, factory shutdowns, reduced exports, logistical collapse, and falling domestic demand. This scenario indicates a rapid entry into recession.

The government of Prime Minister Fumio Kishida is currently finding resources to cushion the blow to the economy and consumers' wallets through subsidies for fuel and electricity, but such measures are draining the budget.

On July 30 and 31, the Bank of Japan will hold a meeting, with the market unanimously expecting the rate to remain at 1%. The main focus will be on changes to the quarterly GDP forecast and Ueda's rhetoric, which may help stabilize the yen's decline if he indicates a readiness to raise rates by the end of the year.

The net short position in the yen increased by an additional $2.2 billion over the reporting week, reaching -$11.65 billion. Speculative positioning remains confidently bearish, and the projected price is skyrocketing.

Technical oscillators suggest a bearish reversal due to extreme overbought conditions, but the projected price behavior indicates that this scenario is unlikely. If Ueda provides a clear signal of an imminent rate hike at the BoJ meeting, the yen could correct to the levels of 161-162. However, if nothing changes, we expect movement toward 165.

This is precisely the level the market currently sees as a red line, beyond which there could be currency intervention, yet even that is likely to yield only a short-term effect. In any case, attempts to curb the yen's decline in April-May were quickly absorbed by the market.