The yen has resumed its depreciation against the US dollar, nearly erasing the impact of the Bank of Japan's recent interest rate increase and a rare "rate check." On September 23, the Japanese currency traded at approximately JPY157.80 to the dollar in London, weakening further to around JPY158 in New York. This renewed weakness leaves Japanese authorities with limited options besides direct market intervention, especially after a quarter-point rate hike on September 18 to about 1.25% failed to significantly narrow the persistent interest rate gap with the US.
Japan has previously undertaken substantial interventions to support the yen. From July 30 to August 26, the Ministry of Finance purchased JPY15.4 trillion, surpassing the JPY11.7 trillion spent in April and May, with the US Treasury also participating on July 31. This record monthly intervention successfully kept the USD/JPY pair below JPY160.00 for four weeks. However, the yen has since lost most of these gains as discussions around potential Federal Reserve rate hikes intensify.
The Bank of Japan's September 18 rate hike was intended to support the currency, but the move was largely priced in, and the disclosure that two of the nine policy board members voted against it cast doubt on future tightening. Following the rate increase announcement, the yen initially fell almost JPY2 in Tokyo afternoon trade, from the mid-JPY156 range to the JPY158 level. Later that day, around 11 PM Japan time, the yen temporarily reversed course, gaining about JPY1, after the BOJ reportedly conducted a "rate check" with foreign exchange desks, a measure stronger than verbal warnings but short of direct intervention.
The current depreciation is particularly notable as it occurred during Japan's extended public holiday, when trading volumes are thin, potentially amplifying currency movements. The USD/JPY pair recently traded above JPY158.00 and was poised to close above its 200-day moving average (around JPY158.43) for the first time since September 4. The significant interest rate differential, with the BOJ's rate at 1.25% compared to the Federal Reserve's 3.75% to 4.00%, continues to incentivize carry trades and exerts downward pressure on the yen. The JPY160 level is now widely seen by market participants as an informal trigger for heightened intervention risk, although officials state they target disorderly moves rather than specific levels.
Japanese markets reopened on Thursday, September 24, with the new BOJ rate in effect. Attention is now focused on whether Japanese authorities will intervene again, the Federal Reserve's future interest rate decisions, and any subsequent policy guidance from the Bank of Japan. If the Fed raises rates further or Japanese authorities refrain from new actions, the yen may remain under pressure. Conversely, a large-scale intervention or a cooling of Fed rate hike expectations could offer some support to the yen. The effectiveness of past interventions has diminished over time, with the record JPY15.4 trillion intervention's impact lasting only four weeks, highlighting the challenge of sustaining yen strength against the widening rate differential.
