The yen is expected to be vulnerable to sharp moves and further declines in the coming week, largely due to a three-day holiday in Japan which will reduce trading liquidity. Investors are also disappointed that the Bank of Japan (BOJ) did not provide stronger guidance on the future pace of interest rate hikes, despite having recently raised borrowing costs. This disappointment follows a decision where two board members dissented against the hike.
The yen had already slid as much as 1.3% against the dollar on Friday. Reports later that day indicated that central bank officials conducted a "rate check" with market participants, a move that can sometimes precede currency intervention to strengthen the yen. However, these efforts only managed to narrow the yen's losses, failing to reverse the overall downward trend.
The BOJ's recent policy actions, while marking a shift from decades of near-zero interest rates, have been perceived as not aggressive enough by some market participants. This contrasts with the Federal Reserve's more hawkish stance, which recently raised borrowing costs for the first time since 2023 and projected further increases. This divergence threatens to keep the interest rate gap between the US and Japan wide, putting continued pressure on the yen. The yen has been trading at levels not seen since the 1980s, which is beneficial for tourists but creates economic challenges for Japan.
