The Bank of Japan (BOJ) raised its benchmark rate to the highest level in 31 years, but the yen continues to weaken as a strong dollar overlaps. As a result, the likelihood of Japanese authorities intervening in the foreign exchange market is growing again.
On the 17th (local time), Bloomberg reported that the yen-dollar rate climbed intraday to 160.80 yen per dollar, the record high since July 2024. The yen weakened again below the psychologically important 160-per-dollar line.
This was driven by a stronger dollar as investors bet on the possibility of additional tightening by the Federal Reserve (Fed). Dollar buying expanded after a Federal Open Market Committee (FOMC) meeting first chaired by the newly inaugurated Fed chair.
Andrew Hazlett, a foreign exchange trader at financial services firm Monex, said, "This FOMC meeting signaled a shift to a hawkish stance," adding, "With dollar strength continuing, the yen has fallen to a level where the likelihood of official market intervention is very high."
The fundamental cause of the weak yen is cited as the interest rate gap between the United States and Japan. Japan's benchmark rate has risen to 1% a year, but it remains far lower than the U.S. benchmark rate (3.75% a year). As a result, the "yen carry trade" of borrowing yen at low rates and investing in U.S. Government Bonds or dollar asset continues.
On top of that, a rise in international oil prices due to tensions between the United States and Iran is fueling yen weakness. Because crude oil is transacted in dollars and Japan is a country with a high dependence on crude oil imports, demand for dollars is increasing, adding further downward pressure on the yen.
Nikkei Asia noted, "After the Fed's rate hold, the yen weakened against the dollar, erasing a significant portion of the gains that the Japanese government had pushed up through market intervention," adding, "The Bank of Japan's benchmark rate hike was also largely priced in, so its effect in inducing yen strength was limited."
Bloomberg predicted, "If it surpasses the current level, the yen's next major resistance will be 161.95 per dollar," adding, "If it breaks through even this level, the yen will fall to its lowest level since December 1986."
As the yen's weakness deepens, the possibility of Japanese government intervention in the foreign exchange market is again drawing attention. From Apr. 30 to May 27, the Japanese government injected about 11.73 trillion yen (about 111 trillion won), lowering the yen-dollar rate from around 160 yen to the mid-155s. Finance Minister Satsuki Katayama also said earlier this month that the government is prepared to take decisive measures to respond to excessive currency volatility.