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Yen Slides for a Third Straight Day as Traders Doubt the Bank of Japan’s Nerve to Keep Hiking
The Japanese yen extended its losing run against the dollar into a third consecutive session Tuesday, with currency traders increasingly skeptical that the Bank of Japan is actually prepared to raise rates quickly enough to close the gap separating it from its global peers.
Last Friday’s rate decision was supposed to be a turning point for the currency. The BOJ lifted its benchmark short-term rate by 25 basis points to 1.25 percent, its highest level in more than three decades. Instead of steadying the yen, though, the move has done the opposite. The currency has now given back the gains that carried it to a seven-month high earlier this month, and the reason comes down almost entirely to how the hike was delivered rather than the hike itself. The decision passed on a 7-2 vote, with two policymakers pushing for a slower, more cautious pace, and the central bank offered relatively little in the way of forward guidance about how quickly further tightening might follow. Markets read that combination as a warning sign rather than reassurance, concluding that additional hikes could prove harder to push through than previously assumed.
By Tuesday, the yen had slipped a further 0.22 percent to trade around 157.70 per dollar, though the decline was somewhat contained by a public holiday in Japan and lingering speculation that authorities could step in to support the currency if the slide accelerates. Naomi Fink, chief global strategist at Amova Asset Management, said whether the central bank speeds up its pace still depends heavily on how events play out from here, noting that questions about where neutral and terminal policy rates actually sit remain genuinely unresolved.
That uncertainty is exactly what’s kept sellers confident even as Japanese officials continue signaling they’re watching the currency closely. Hassan Fawaz, chairman and founder of brokerage firm GivTrade, argued that renewed intervention from Tokyo would function more as a temporary warning shot than an actual fix, since traders simply don’t believe Japan’s tightening cycle will move fast enough to meaningfully challenge the dollar’s yield advantage.
The numbers behind that skepticism are fairly stark. Markets are currently pricing in only about a 30 percent probability that the BOJ raises its benchmark rate again, to 1.5 percent, at its October meeting. Compare that to expectations on the other side of the Pacific, where traders see roughly a 53 percent chance the Federal Reserve lifts its own policy rate by another 25 basis points, to a range of 4 percent to 4.25 percent, building on the hike the Fed already delivered earlier this month. That asymmetry, a Fed that markets expect to keep tightening more aggressively against a BOJ that’s struggling to convince anyone it can keep pace, is precisely the dynamic keeping pressure on the yen.
It’s worth remembering why that gap matters so much for currency traders specifically. Japan’s persistently low interest rates have long made the yen the funding currency of choice for what’s known as the carry trade, where investors borrow cheaply in yen and use the proceeds to buy higher-yielding assets elsewhere in the world. Every time the expected pace of BOJ tightening slows or disappoints, that trade becomes more attractive again, adding fresh selling pressure to the yen almost automatically. Some analysts, including strategists at Danske Bank, had actually expected the central bank to signal a more nimble approach to tightening compared with its historically cautious cycle. Friday’s underwhelming guidance suggests that shift, if it’s coming at all, isn’t arriving as quickly as some had hoped.
The yen wasn’t alone in losing ground Tuesday, though its slide was among the more pronounced. The euro edged 0.1 percent lower to $1.1453, its weakest level since late July, even as European Central Bank officials have continued striking a notably hawkish tone of their own, keeping an October rate hike firmly on the table. Sterling dipped a more modest 0.03 percent to $1.3365. Broader market conditions haven’t made things any easier for traditionally defensive currencies like the yen either, with escalating tensions tied to both the Russia-Ukraine conflict and ongoing friction in the Middle East adding another layer of caution across currency markets more generally, even as risk appetite elsewhere, reflected in a strong run for bitcoin toward an eight-month high, has stayed surprisingly resilient.
For now, all eyes remain on BOJ Governor Kazuo Ueda and how he frames the path forward at the central bank’s coming meetings. Because Friday’s hike was so widely expected going in, currency markets reacted less to the decision itself and more to what it implied about the pace still to come. Any future signal validating a genuinely quicker, quarterly hiking rhythm could prompt traders to unwind some of their yen-funded carry positions and offer the currency real support. Until that signal actually arrives, though, the yen looks set to keep testing sellers’ patience rather than buyers’ confidence.
