USD/JPY jumps to one-month high as Yen slides after BoJ rate hike

The Japanese Yen (JPY) weakens sharply against the US Dollar (USD) on Friday as the Yen slumps across the board following the Bank of Japans interest rate decision. At the time of writing, USD/JPY is trading around 157.48, up nearly 1.20%, its highest level since November 21.

Earlier in the Asian session, the BoJ raised its policy rate by 25 basis points (bps) to 0.75%, marking the highest level in roughly three decades. The central bank stated that Japans economy has continued to recover at a moderate pace, with tight labor market conditions and solid corporate profits supporting steady wage increases.

Policymakers also noted that underlying inflation has been rising gradually, helped by firms passing higher labour costs on to prices, increasing confidence that inflation can be sustained around the 2% price stability target over time.

However, the BoJ also stressed that real interest rates remain significantly negative and that accommodative financial conditions will continue to support the economy. The central bank said it will continue to adjust policy in line with developments in economic activity, prices, and financial conditions, signalling a cautious approach to further tightening.

In reaction to the rate hike, Japanese Government Bond (JGB) yields moved higher, with the 10-year JGB yield rising above 2.0%, its highest level since 1999. Higher yields have renewed concerns about Japans large public debt, as rising interest rates could gradually lift government debt-servicing costs.

Meanwhile, Japanese authorities reiterated their focus on currency market developments. The central bank said it will pay close attention to movements in financial and foreign exchange markets as part of its ongoing policy assessment. Separately, Japans Finance Minister Satsuki Katayama said on Friday that authorities would take appropriate action against excessive foreign exchange moves.

A steady US Dollar is also weighing on the Yen, although expectations of further monetary policy easing by the Federal Reserve (Fed) may limit further gains in the Greenback.

Data released on Friday showed softer US consumer sentiment, with the University of Michigans Consumer Expectations Index revised down to 54.6 from 55.0, while the headline Consumer Sentiment Index was finalised at 52.9. On the inflation side, one-year consumer inflation expectations edged up to 4.2%, while the five-year outlook remained unchanged at 3.2%.

Bank of Japan FAQs

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The banks policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

The Bank‘s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJs 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.