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Japanese Yen Weakens After BoJ Rate Hike
Confirmed
In Short: The Japanese yen weakened against the US dollar on Monday after the Bank of Japan raised its short-term interest rate target.
The Japanese yen weakened against the US dollar on Monday after the Bank of Japan (BoJ) raised its short-term interest-rate target to 1.25% from 1.00%, a move widely anticipated by financial markets.
The USD/JPY exchange rate eased back below 157.00 in Asia on Monday, reflecting modest strength in the Japanese yen amid concerns over potential intervention risks following Friday's BoJ rate decision.
The BoJ's decision was made in a 7-2 vote, marking another step in the normalisation of monetary policy.
Despite the rate hike, the BoJ's dovish stance kept Japanese yen bulls on the back foot, with the USD/JPY pair trading near 157.50 in the Asian session on Tuesday.
The market is pricing in a weighted-average rate of 4.69% as of 15 September 2027, up 12 basis points over the week and 62 basis points over the month, a key driver of the USD’s rise during this period.
What this adds
The Japanese yen's weakness is driven largely by expectations that the BoJ may increase interest rates sooner or more aggressively than markets had anticipated.
A historical example cited by analysts is Sweden's Riksbank, which raised its policy rate to 500% in the early 1990s to defend the krona, only to abandon its exchange-rate peg shortly after.
Background
The British pound is sliding near the 1.3335 level against the US dollar, according to FXStreet.
The Japanese yen (JPY) remains under pressure following a strong rebound in the US dollar (USD) last week. USD/JPY eased below 157.00 in Asia on Monday, despite modest yen strength amid looming intervention risks.
What's confirmed
- The Japanese yen weakened against the US dollar on Monday after the Bank of Japan (BoJ) raised its short-term interest-rate target to 1.25% from 1.00%, a move widely anticipated by financial markets.
- The USD/JPY exchange rate eased back below 157.00 in Asia on Monday, reflecting modest strength in the Japanese yen amid concerns over potential intervention risks following Friday's BoJ rate decision.
- The BoJ's decision was made in a 7-2 vote, marking another step in the normalisation of monetary policy.
- Despite the rate hike, the BoJ's dovish stance kept Japanese yen bulls on the back foot, with the USD/JPY pair trading near 157.50 in the Asian session on Tuesday.
- The market is pricing in a weighted-average rate of 4.69% as of 15 September 2027, up 12 basis points over the week and 62 basis points over the month, a key driver of the USD’s rise during this period.
What's still developing
- The currency pair is facing downward pressure as the New Zealand Dollar (NZD) weakens following signals that future Reserve Bank of New Zealand (RBNZ) rate hikes will be gradual.
- This incremental move higher, in line with the elevated FXS Speechtracker score, suggests Musalem’s remarks add marginal upside risk to future rate expectations and support a constructive backdrop for the Dollar against lower-yielding peers.
- The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.
- In particular, the bank notes that “the longer energy prices remain elevated, the higher the chances of upward revisions in policy projections by year-end,” suggesting that the current rate ceiling could be revisited if inflation pressures prove more persistent than the RBNZ currently anticipates.
- The focus on broad commodity shocks, including base metals like copper, and core inflation still “too high” at up to 3% reinforces a sustained hawkish bias for the Dollar.
- The Mexican Peso appreciates against the US Dollar on Thursday, with the latter weakening amid a dovish tilt by Fed Governor Waller and speculation about an FX market intervention to boost the Japanese Yen.
- Wall Street finished Thursday’s session on a positive note, as Fed Governor Waller opened the door to holding rates unchanged.
- He supports that decision if the disinflation process evolves, but if a red-hot US CPI report is released next week, he warned that a rate hike is possible.
- On Wednesday, the Bank of Mexico (Banxico) Deputy Governor Jonathan Heath warned that Banxico should not cut rates in the near term, adding that a resumption of the easing cycle may be about a year away.
- He will support a rate cut if core inflation converges to the Mexican central bank’s 3% goal.
- Ahead, the US economic docket will feature August’s Nonfarm Payrolls and Unemployment Rate update.
- Bank of Japan board member Hajime Takata said the central bank should raise interest rates “nimbly” to counter intensifying inflationary pressures rather than follow a fixed, semiannual tightening schedule.