Japan Weighs Yen Intervention as Currency Suffers Sharp Decline
The yen's sharp decline versus the US dollar represents a critical threat to Japan's economic stability.
The Bank of Japan (BoJ) lifted its benchmark policy rate 25 basis points to 0.75%—matching market predictions—responding to mounting inflationary forces and persistent currency weakness. The rate adjustment marks Japan's highest borrowing cost in three decades.
However, the central bank's tightening measures have failed to halt the yen's downward spiral. BoJ Governor Kazuo Ueda avoided providing concrete guidance on future rate increases' timing or speed, stating policy decisions would remain data-dependent. The yen extended losses while bond yields climbed following his statements.
Market observers highlight that Japan's annual inflation reached 2.9% in November, indicating the 0.75% policy rate remains insufficiently restrictive to control price pressures.
Japanese finance minister Satsuki Katayama signaled potential intervention to combat extreme yen volatility.
Katayama told reporters the current exchange rate dynamics don't align with underlying economic fundamentals, pledging the government would implement suitable countermeasures.
Despite the rate increase, the dollar-yen exchange rate declined marginally—from 157 to 156.
Japanese authorities last entered currency markets in July 2024 when the exchange rate touched 161.96 per dollar, representing the weakest level since 1986.
Yen Weakens on Concerns Interest Rate Gap May Persist
Sadi Kaymaz, an Asian markets analyst, told media that Japan's monetary and fiscal strategies, alongside its currency trajectory, have grown increasingly unpredictable.
He said uncertainty remains over the pace and extent of the BoJ's rate-hiking cycle, adding that downward pressure on the yen persists.
Kaymaz identified the BoJ's perceived lack of hawkishness as a primary catalyst behind the yen's depreciation.
"Despite the slow but steady rise in Japanese interest rates, developed Western countries boast resistant rates at relatively high levels, which is another factor affecting the situation," he said. "The Japanese yen is losing value due to the perception that the interest rate gap may not close fast."
Kaymaz reported investors continue borrowing local currency while deploying capital into assets across developed or emerging markets, particularly in Australia and Europe.
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