Yen declines as uncertainty grows over further rate hikes

Highlights

The yen weakened as much as 1.3% to 158.05.
The Bank of Japan raised its policy rate to 1.25%.
The rate decision passed by a 7-2 vote.
Ueda kept future policy options open.

The yen fell as much as 1.3% to 158.05 per dollar after Ueda left the Bank of Japan's options open on the timing and size of future rate moves without committing to faster tightening, Bloomberg reported. The Bank of Japan raised its policy rate by 25 basis points to 1.25%, matching the expectation of every economist surveyed by Bloomberg, but the decision passed by a 7-2 vote.

Split Bank of Japan vote pressures the yen

Board members Toichiro Asada and Ayano Sato opposed the increase. Both were appointed by Prime Minister Sanae Takaichi, adding another element for investors assessing how the composition of the board could affect monetary policy over time.

The yen's reaction reflected how much tightening had already been incorporated into market prices. Expectations for faster Bank of Japan action had helped the currency rally earlier in September, alongside an unwind of yen-funded carry trades and speculation that Japanese pension funds could allocate more capital domestically.

Ueda indicated that no specific policy option would be excluded ahead of future meetings, including consecutive increases or larger moves. That flexibility, however, offered investors little confirmation that the Bank of Japan intends to accelerate its tightening cycle.

Japanese assets showed a mixed response. The Nikkei 225 gained 1.78% in afternoon trading, while the Topix was little changed as financial shares weighed on the broader index. Japanese government bond yields edged lower across the curve.

Currency weakness puts intervention back in focus

The yen's slide has renewed attention on Japan's willingness to intervene in foreign-exchange markets. Japan and the U.S. conducted coordinated yen purchases earlier this summer, and Japan spent a record ¥15.4 trillion, or $98.3 billion, on intervention in the month through Aug. 26.

The move toward 158 is significant because the Bank of Japan is tightening monetary policy while the currency is still losing ground against the dollar. Investors are now weighing whether future Bank of Japan increases will be sufficient to narrow the interest-rate gap with the U.S.

With the yen again approaching 160 per dollar, both the pace of Bank of Japan tightening and the possibility of further official intervention are likely to remain central to currency markets.

We also reported Japan plans blockchain system for stock and bond settlement.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.