Yen Sinks Despite Japan Rate Hike

Japan’s central bank has lifted borrowing costs to their highest level in more than three decades, but the yen responded by moving sharply lower. The reaction underlined a growing challenge for policymakers: higher rates alone may not be enough to stabilise the currency.

The Bank of Japan raised its benchmark rate by 0.25 percentage points to 1.25 per cent, the highest level since 1995. The decision, approved by a 7-2 vote, marked another step away from the ultra-loose monetary policy that shaped Japan’s economy for years. Governor Kazuo Ueda also warned that underlying inflation could move beyond the bank’s 2 per cent target, keeping the prospect of further tightening alive.

Investors had already priced in much of the move. Attention quickly shifted to divisions within the policy board and uncertainty over how rapidly rates might rise from here. The yen fell about 1.3 per cent to around ¥158 against the dollar, despite the increase and Ueda’s more cautious inflation message.

That reaction reflects the limits of gradual tightening. Japanese rates remain well below those in other major economies, reducing the support that higher domestic borrowing costs might otherwise provide to the currency.

The yen had recovered earlier this year after joint intervention by Japan and the United States, but much of that improvement has since faded. Japanese authorities have continued to signal concern over excessive currency moves.

The rate increase therefore changes Japan’s monetary landscape without resolving its currency problem. Markets now want clearer evidence that tightening will continue, leaving the Bank of Japan with less room to rely on signalling alone.