The Bank of Japan lifted its benchmark rate to 1.25%, a 31-year high, but the yen sank anyway after two board members dissented. The currency has now given back roughly half the gains it made following July's US-Japan intervention, with the Federal Reserve and European Central Bank both tightening the same week.
The Bank of Japan raised interest rates to their highest level since 1995, yet the yen fell instead of rising. The BoJ's policy board voted 7-2 for a 0.25 percentage point increase, taking the target rate to about 1.25%.
Dissent undercuts a hawkish signal
Governor Kazuo Ueda pointed to the risk of underlying inflation overshooting the BoJ's 2% target, saying, according to the FT: "our policy phase has changed." Even so, the yen sank 1.3% to nearly ¥158 to the dollar as the dissenting votes cast doubt on the appetite for further tightening.
Those two dissenters were appointed by Prime Minister Sanae Takaichi, who favors reflationary spending. Analysts at Capital Economics said that with the board's most hawkish members due to leave next July, its composition will probably become even more dovish.
The yen touched its lowest level since September 3, tumbling 0.8% to around 157.145 per dollar, putting it on course for an over 2% weekly decline. That would mark its worst weekly performance since October of last year.
A costly reversal since July's intervention
The interest rate rise follows a rare joint US-Japan currency intervention in July, after the yen hit 40-year lows. Japan deployed about $96bn in July and August to support the currency, and finance minister Satsuki Katayama said Tokyo would not hesitate to intervene again. Despite that effort, the yen has now given up nearly half of its post-intervention gains.
Citi economist Sosuke Nakamura said the BoJ needs to outpace the Federal Reserve's rate increases to ease pressure on the yen from the US-Japan rate gap. The Fed raised rates on Wednesday for the first time since 2023, to a range of 3.75% to 4%, and the ECB lifted its own rate to 2.5% last week.
Fresh data added to the picture: Japan's August core consumer price index rose 1.7% year-on-year, missing analyst expectations of 1.8%. Money markets tracked by CME FedWatch are pricing a 53% probability of another Fed hike before year-end. Japan's 10-year bond yield, meanwhile, stayed near 3%, its highest point in three decades.
Sources: Financial Times, Investing.com
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