On Tuesday, the yen came under pressure against the US dollar as traders bet that Japanese policymakers would struggle to keep pace with the global shift toward tighter monetary policy, a dynamic that markets believe will sustain a wide interest rate differential between Japan and major economies. The dollar-yen pair was last quoted at 157.45.
The Bank of Japan delivered a widely expected 25-basis-point rate hike on Friday, lifting its benchmark rate to 1.25%, the highest level in 31 years. However, this anticipated move failed to boost the yen, which instead weakened as market participants viewed BOJ Governor Kazuo Ueda's post-meeting comments as falling short of the more hawkish tone some investors had hoped for. The currency's decline was limited by a Japanese public holiday and concerns that authorities might step into the foreign exchange market, especially after reports that Japan conducted a rate check on the dollar-yen pair on Friday, a move often seen as a precursor to official intervention. Aside from a brief rebound following those reports, the yen has remained under pressure since the BOJ's rate increase.
Where the BOJ stands
When asked about the possibility of a 50-basis-point hike or consecutive increases, Governor Ueda said at the press conference: "That depends on how the price situation evolves. There are various possibilities, and we should not rule out any options." He added, "We are at a stage where we need to carefully scrutinize the data. But that does not mean we can act slowly. We will analyze the data closely and take action in a timely manner when necessary." On the future pace of rate hikes, Ueda noted: "We do not have a preset idea, such as every three months. We will decide at each policy meeting how best to ensure underlying inflation is stable at 2%." He also emphasized, "As we raise rates, financial conditions are becoming less accommodative... It is important to avoid overly tight financial conditions or a sharp adjustment in asset prices due to excessive rate hikes."
Dissent adds to dovish concerns
Beyond Ueda's less hawkish remarks, the BOJ's policy board saw two members vote against the rate increase on Friday, fueling worries about the central bank's lack of hawkish conviction. Among the nine members, Ichiro Asada and Ayano Sato opposed the move. Asada cited that core CPI excluding fresh food was below 2% and that "the economic situation is not necessarily strong," while Sato argued that economic and price conditions had not accelerated significantly and that "a rate hike at this time is inappropriate."
This stands in contrast to the Federal Reserve, which also raised rates last week, as well as to the stance of most other global central banks, which have signaled further tightening this year following a wave of hawkish guidance.
Market expectations diverge
Current market pricing suggests roughly a 30% probability that the BOJ will lift its benchmark short-term rate to 1.5% by October. Meanwhile, the market sees about a 55% chance that the Fed will hike by another 25 basis points in October, taking the federal funds rate target range to 4% to 4.25%.
Carlos Casanova, senior economist for Asia at UBS Private Banking, noted in a client report: "Unless the BOJ tightens faster than the Fed, the roughly 275-basis-point spread between US and Japanese rates will continue to support yen-funded carry trades." He added, "We expect the dollar-yen pair to reach 160 by year-end, followed by a modest pullback to 156 by mid-2027."
Other currencies under the microscope
Beyond the yen, the New Zealand dollar is also expected to face pressure. With New Zealand's interest rate at just 2.75%, notably lower than other major economies, the kiwi has been hovering near multi-month lows, trading at 0.5708 against the US dollar. In addition, Reserve Bank of Australia Governor Michele Bullock is scheduled to deliver hawkish signals during a fireside chat later on Tuesday. Markets currently assign a 90% probability that the Australian central bank will hike rates next week, which would mark its fourth increase this year.
Analysts at ANZ noted in a report: "As higher-yielding currencies benefit from more attractive carry returns, the New Zealand dollar's price action looks weak." They added, "Even if the market prices in around five more rate hikes from the Reserve Bank of New Zealand, that would still not be enough to bring the official cash rate close to the US federal funds rate or the RBA cash rate, both of which are expected to keep rising."
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