---

Japan’s yen is once again sliding toward levels that unsettle policymakers, even after the Bank of Japan delivered its biggest rate hike in decades. For global investors, the central bank’s cautious messaging has reopened the door to risky but lucrative currency trades, raising fresh questions about how far the yen could fall and how Japan might respond.

A rate hike that failed to reassure markets

The Bank of Japan (BOJ) raised its benchmark interest rate to 0.75%, the highest level in more than 30 years. On paper, the move signaled progress toward policy normalization after years of ultra-loose monetary settings.

In practice, markets focused less on the hike itself and more on what came next.

Speaking to reporters after the decision, BOJ Governor Kazuo Ueda offered little guidance on the future path of rates. He emphasized that decisions would be made meeting by meeting, based strictly on incoming data, and declined to outline where Japan’s so-called neutral interest rate might sit.

For investors hungry for clarity, the absence of urgency was striking.

Carry traders seize the moment

The lack of a clearly hawkish signal emboldened traders who profit from carry trades, borrowing in low-yielding currencies like the yen and investing in higher-yielding assets elsewhere.

Dealers said selling pressure quickly built against the yen, particularly through euro/yen and Australian dollar/yen positions. These currency pairs allow investors to sidestep the volatility of U.S. dollar moves while still capturing attractive yield differentials.

“The market accepts that more hikes could come,” said Tareck Horchani, head of prime brokerage dealing at Maybank Securities in Singapore. “But it’s not buying into a fast or aggressive tightening cycle.”

Horchani added that the euro trade reflects policy divergence, while the Australian dollar and South African rand remain popular for their strong yield appeal.

Yen weakens despite rising domestic yields

The yen’s reaction was swift.

During London trading, the currency fell roughly 1% to around 157 per dollar, before sliding to a record low near 184 per euro. The move came even as Japanese government bond yields pushed to new multi-year highs, normally a factor that would support the currency.

Instead, investors appeared confident that Japan’s rate increases would remain gradual, keeping borrowing costs low relative to other major economies.

That confidence is reflected in market pricing. According to LSEG data, traders do not fully price in another BOJ rate hike until November 2026, underscoring skepticism about a rapid policy shift.

Shifting positions tell a broader story

Speculative positioning data paints a similar picture.

Although recent U.S. government disruptions delayed updates, earlier figures showed that a record-long yen position built up in April had largely evaporated by early December, leaving markets close to neutral.

At the same time, investors are increasingly expressing yen views through other currencies rather than the dollar.

Bart Wakabayashi, Tokyo branch manager at State Street, said client positioning in Aussie/yen and euro/yen is now near five-year highs.

“I think the yen will remain under pressure,” Wakabayashi said, noting that diversification away from dollar-based trades has become more common.

A political and economic headache at home

For Japanese officials, the renewed weakness is deeply uncomfortable.

A cheaper yen raises the domestic cost of energy, food, and raw material imports, squeezing households and businesses already grappling with inflation. While exporters benefit, policymakers have grown more vocal about the downside risks.

Finance Minister Satsuki Katayama warned last month that the negative effects of yen weakness were starting to outweigh the positives. As the dollar exchange rate approached the 158 level, officials repeatedly signaled readiness to intervene if moves became excessive.

Corporate Japan is also uneasy.

A recent Tokyo Shoko Research survey of more than 6,000 companies found that 41.3% believe the yen is too weak. On average, firms said they would prefer an exchange rate closer to 133.5 per dollar, about 18% stronger than current levels.

Why the BOJ alone may not be enough

Strategists caution that reversing years of yen depreciation will be no easy task.

“The weak yen is largely a delayed consequence of the extreme easing over the past decade,” said Naka Matsuzawa, Japan macro strategist at Nomura. “It’s unrealistic to expect a few rate hikes to undo that.”

Matsuzawa argues that broader government action is essential, including structural reforms, deregulation, and measures to boost productivity and inbound investment.

Without those changes, modest rate increases may struggle to alter long-term capital flows or restore confidence in Japanese assets.

Can intervention stop the slide?

In the short term, Japan’s finance ministry retains one powerful tool: currency intervention.

By selling dollars and buying yen, authorities can slow or temporarily reverse sharp declines. Such actions have successfully jolted markets in the past, discouraging speculative excess.

However, many analysts doubt intervention alone can provide a lasting fix, especially if monetary policy remains cautious.

“I don’t see a strong signal of sustained hawkishness,” said Peiqian Liu, Asia economist at Fidelity International. “Without that, intervention risks becoming a stopgap rather than a solution.”

Markets sense calm, not confrontation

Ironically, the very predictability of Friday’s BOJ meeting has reassured risk-takers.

As one senior trading executive at a major global bank put it, the absence of surprises was exactly what carry traders wanted.

“For those already running carry positions, they can relax,” the executive said. “They’re not being forced to rush for the exits.”

What comes next for the yen

The yen now sits close to where it began the year, firmly within a zone that alarms policymakers but still entices global investors.

Unless Japan delivers clearer signals of tighter policy or pairs rate hikes with broader economic reforms, analysts expect pressure on the currency to persist.

For now, the message from markets is clear: caution from the BOJ has been interpreted not as restraint, but as permission.

 

ALSO READ:  How Small Businesses Can Use AI to Fuel Growth