The Japanese yen declined sharply to 156.88 yen per dollar, marking a two-week low after the Bank of Japan's widely-expected rate hike failed to provide the market support traders anticipated. The US dollar rose 1.3% to a two-week high of 158.05 yen before paring gains, setting it up for its largest weekly rally since October 2025. According to Bloomberg, the yen slid as much as 1.3% versus the dollar on Friday when trading opened, with the currency ending the session at 156.88, down more than 2% for the week. The disappointment came despite the BOJ pushing rates to their highest level in 31 years at 1.25%, with the move failing to boost the currency as traders felt there was a lack of explicitly hawkish guidance. The decision, coming on the heels of the Fed's hawkish message from earlier this week, clears the way for further dollar strength, strategists said.
The yen's decline was particularly pronounced after two policy makers at the Bank of Japan dissented from the widely expected decision to raise interest rates, raising doubt among traders about the likelihood of further hikes. As reported by The Economic Times, Ray Attrill, head of FX strategy at National Australia Bank, noted that "they couldn't even get the unanimous vote for that" which "really raised eyebrows in the market." The dissent from Asada and Sato points to resistance against the fastest pace of rate increases in more than three decades and suggests they may increasingly act as a brake on further tightening. Market strategist Steven Englander from Standard Chartered observed that "the lack of hiking punch makes it easier for USD to go higher" and noted that "the USD strength that we have been forecasting for the medium to long term may finally be here."
The yen's decline accelerated after Japanese authorities conducted rate checks in the currency market — considered a preliminary step before intervention — the Nikkei newspaper reported. As reported by Bloomberg, the reported rate check also highlights the risk that authorities come back into the market to arrest further weakness in the yen, which would bring rapid price swings that can burn traders. The thinner liquidity expected because of holidays in Japan through Wednesday presents an opportunity to amplify the impact of any official intervention. A similar window around the Golden Week holiday from late April to early May saw Japan stepping in after the currency weakened beyond 160. The yen had rallied sharply in early September to its highest since February as traders bet the BOJ would embark on multiple rate hikes, although those wagers came under question on Friday.
Governor Kazuo Ueda sent mixed signals on the path for future hikes following the BOJ's increase on Friday, indicating hawkishness by noting that the stage for policy setting had shifted, but also saying it was difficult to determine the terminal rate for the current tightening cycle and giving little away on the pace of future hikes. According to Bloomberg, swaps markets have a hike less than 20% priced in for the next policy meeting at the end of October, while an increase is almost 90% priced in for the December policy decision. The most recent round of yen intervention, which began in late July when the US entered the market alongside Japan, bolstered the currency by more than 6%, though the rally peaked at 152.89 on Sept. 8. Japan spent a record ¥15.4 trillion on intervention in the month through Aug. 26, according to Finance Ministry data, with US Treasury Secretary Scott Bessent continuing to signal support for a stronger yen.
Hedge funds turned positive on the yen for the first time since July 2025 in the week ended Sept. 15, a noteworthy shift in sentiment after the intervention, as reported by Bloomberg. However, this pivot to bullishness risks catch traders wrongfooted after the BOJ disappointed some market participants who'd hoped for more hawkishness. The yen's rally at the start of this month had been fueled by expectations of faster BOJ tightening, an unwind of yen-funded carry trades and speculation that Japanese pension funds could shift more money to domestic assets. The yen slumped to about 164 per dollar in July, its weakest in four decades, setting the stage for the coordinated US-Japan yen-buying operation. Morgan Stanley MUFG Securities strategists noted that "looking ahead, we think the external backdrop remains a headwind for JPY".
