Global markets are monitoring the Bank of Japan’s interest-rate decision scheduled for July 31 as the yen approaches fresh 40-year lows against the US dollar. The exchange rate neared 164 on Tuesday, close to the multi-decade highs recorded last week.

The central bank’s benchmark rate currently stands at 1 percent, its highest level since September 1995. Market pricing indicates a high probability that policymakers will leave the rate unchanged, following the increase enacted in June. At that time the bank indicated that further adjustments to the degree of monetary accommodation would be appropriate as underlying consumer price inflation approaches 2 percent and financial conditions remain accommodative.

The yen has long functioned as a primary global funding currency because of Japan’s historically low interest rates, high market liquidity and earlier current-account surpluses. The rise in domestic inflation since 2022 has increased the risk of sudden reversals in positions that borrow in yen to invest elsewhere. The currency has remained above the 160 level against the dollar even after the June rate increase.

Policymakers have previously noted that exchange-rate movements can influence domestic prices more readily than in the past, given firms’ greater willingness to raise wages and prices, and that such effects may feed into inflation expectations. A significant policy shift or intervention to support the yen could trigger rapid unwinding of leveraged carry trades. Such reversals have historically been abrupt rather than gradual and have previously transmitted volatility into broader risk assets, including cryptocurrency markets. The overall direction of policy, rather than the precise timing of any future rate change, remains the central consideration for global liquidity conditions.