YEN SINKS AFTER BANK OF JAPAN RAISES RATES TO HIGHEST LEVEL SINCE 1995 / THE FINANCIAL TIMES

Yen sinks after Bank of Japan raises rates to highest level since 1995

Hawkish comments by BoJ governor fail to arrest renewed slide in currency after borrowing costs lifted to 1.25%

Leo Lewis and David Keohane in Tokyo

The Bank of Japan’s policy board voted for a 0.25 percentage point increase by a 7-2 margin © Manami Yamada/Reuters

The Bank of Japan has raised interest rates to a 31-year high, accelerating monetary policy normalisation under mounting pressure from Washington but failing to arrest an ongoing slide in the yen.

The BoJ’s policy board on Friday voted for a 0.25 percentage point increase by a 7-2 margin, taking its target rate to about 1.25 per cent.

In a signal to markets that further rises in borrowing costs are likely to follow, BoJ governor Kazuo Ueda highlighted the risk to Japan’s economy of underlying inflation overshooting the central bank’s target of 2 per cent. 

The BoJ’s previous focus had been to push rates higher after years of deflation. 

Now, said Ueda, “our policy phase has changed”.

However, the yen sank 1.3 per cent to nearly ¥158 to the dollar following the decision despite Ueda’s comments, as the dissenting votes cast doubt on the appetite for further tightening in Japan at the end of a week that also saw a US rate rise.

“The BoJ was always going to struggle to beat market expectations since a quarter-point hike was almost fully priced in,” said Stefan Angrick, head of Asia-Pacific economics at Moody’s Analytics.

The currency had rebounded from 40-year lows in July following a rare joint US-Japan intervention in currency markets, and pressure from US Treasury secretary Scott Bessent for Tokyo to step up the pace of rate increases. 

But the yen has now given up nearly half of its post-intervention gains, despite Bessent earlier this month warning traders not to bet against it, telling market participants that “I am the house now”.

Japan’s finance minister Satsuki Katayama told reporters on Friday that Japan “would not hesitate” to conduct another bout of co-ordinated intervention in the foreign exchange market. 

Japan deployed about $96bn in July and August to support the yen.

The rate rise followed similar moves by the European Central Bank and the US Federal Reserve, as monetary authorities around the world grapple with price rises triggered by the Middle East conflict and the consequences of the AI boom.

The BoJ, which last increased rates in June, to 1 per cent, had previously indicated it planned to raise them at intervals of about six months. 

On Friday, Ueda said he did not have any preconceived timetable in mind for a pace of future rate increases but would determine at each meeting how best to ensure underlying inflation stabilises at 2 per cent.

Analysts noted that the two dissenting voters on the board were both appointed by Japan’s Prime Minister Sanae Takaichi, who favours reflationary government spending and has in the past been critical of tighter monetary policy. 

Marcel Thieliant, head of Asia-Pacific at Capital Economics, said that “with the two most hawkish board members set to depart next July, the composition of the board will probably become even more dovish”.

But the overall tone of the bank’s statement was still hawkish according to analysts, leaving open the possibility of at least one more rate increase by December.

Expectations that the central bank would play a critical role in supporting the yen had also weighed heavily on the BoJ, analysts said, as Japan wrestled with higher costs of imported energy, food and other materials.

The BoJ statement repeated the concerns raised at its previous meetings that underlying inflation could push higher than the bank’s 2 per cent target as upward pressure from business-to-business transactions “started to spill over into consumer prices”.

The US Federal Reserve on Wednesday raised rates for the first time since 2023, to a range of 3.75 per cent to 4 per cent, stoking what traders see as a risk of a “rate hike race” between the central banks.

That will have consequences for the “yen carry trade”, which relies on taking advantage of cheap borrowing costs in the Japanese currency to invest in higher-yielding assets abroad.

Sosuke Nakamura, Japan economist at Citi, said that because the US had raised rates this week, the probability of an additional BoJ rate increase this year had increased. 

“In order to alleviate the downward pressure on the yen stemming from the US-Japan interest rate differential, the BoJ needs to outpace the Fed’s rate hikes,” said Nakamura.

The yield on Japan’s benchmark 10-year bond was little moved after the release but was still trading near 3 per cent, its highest point in three decades.

The ECB last week also raised rates by a quarter percentage point to 2.5 per cent, its second increase this year.