Yen sinks to 34-year low after Bank of Japan holds interest rates near zero

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The yen tumbled to a fresh 34-year low on Friday after the Bank of Japan kept interest rates on hold and offered no indication it was in a hurry to arrest the currency’s slide with higher borrowing costs.

The Japanese currency traded as low as ¥157.78 to the dollar after BoJ governor Kazuo Ueda said the weakness of the yen was so far having “no major impact” on Japanese inflationary pressures, fuelling speculation that the government might directly intervene in markets to support the currency.

Earlier, BoJ policymakers had voted unanimously to keep benchmark interest rates within a range of about zero to 0.1 per cent.

Investors had not anticipated a rate rise this week after the central bank last month ended its negative interest rate policy by raising borrowing costs for the first time since 2007, given Ueda had previously indicated that any further tightening would be gradual.

But the BoJ’s position had been complicated by the yen’s depreciation and signals that the US Federal Reserve will have to keep interest rates high to tame inflation, leading to speculation in markets that the central bank might hint at further rate increases later in the year.

“Currency rates are not a target of monetary policy to directly control,” said Ueda in a press conference following the BoJ’s rate announcement. “But currency volatility could be an important factor in impacting the economy and prices. If the impact on underlying inflation becomes too big to ignore, it may be a reason to adjust monetary policy.”

The central bank’s apparent lack of concern over the weak yen has prompted speculation that Japan’s finance ministry — which can sell currency reserves to prop up the currency — might intervene directly in markets.

Later in the day, the yen rose to ¥154.99 before falling sharply back within a space of 30 minutes.

One Tokyo-based trader said the yen’s sudden rise in the late afternoon had initially appeared to be an intervention by the finance ministry, but it could have been the result of an error since the yen’s depreciation did not last long enough to scare speculative money out of bearish yen positions.

Another trader said the sharp movement was sparked by rumours that officials had asked currency traders about market conditions in a so-called rate check. Such questioning occurred before authorities intervened directly to prop up the yen in September and October of 2022.

The finance ministry declined to comment.

“There is no intention by the BoJ to stop the yen’s decline, at least looking at its statement and its outlook report,” said Masamichi Adachi, economist at UBS. “The finance ministry will have to act [to stem the yen weakness].”

He added: “It would have been more effective if both the government and the BoJ faced the same direction.”

The Nikkei 225 stock index briefly rose more than 1 per cent after the announcement. It closed 0.8 per cent higher on Friday.

The BoJ forecast that “core-core” inflation, a closely watched measure that strips out volatile food and energy prices, would remain near its 2 per cent target for the next three years. Ueda said the central bank would raise rates or adjust the degree of its easing measures if prices rose in line with its outlook.

In a single-page statement, the BoJ also noted that it would continue to purchase Japanese government bonds to guard against sharp rises in borrowing costs but dropped a previous footnote on how much it would buy each month.

The BoJ has long struggled to maintain price rises at sustainable levels to keep the economy out of deflation. While domestic consumption remains weak, the falling yen is expected to fuel inflation in the months ahead by increasing the cost of imported goods.

Investors expect the BoJ to raise rates in July at the earliest if the bank confirms increases in service inflation and real wages, which would help boost consumption. Following the dovish tone on Friday, however, Adachi said he did not expect the next rate rise until October.

“Markets remain on high alert for any indication of whether the yen’s current weakness will be interpreted as a lasting inflationary signal,” said Naomi Fink, global strategist at Nikko Asset Management.

“The BoJ however is likelier to find any knock-on impact from yen weakness upon inflation as more concerning than short-term currency moves.”