Yen slumps 1% against Singdollar, greenback after BOJ hikes rates

[SINGAPORE] The Japanese yen weakened more than 1 per cent against the Singdollar after the Bank of Japan (BOJ) hiked interest rates by 25 basis points on Friday (Sep 18).

The yen also slumped about 1 per cent against the US dollar.

It was trading at 123.4 per Singdollar as at 4.11 pm in Asia, and at 158 per US dollar.

Rates were raised to 1.25 per cent by Japan’s central bank – a new high in 31 years – amid renewed inflation concerns.

This was a widely expected move, though the vote was split 7-2 as board members Toichiro Asada and Ayano Sato dissented. The split vote caused some caution as it did not support expectations for rate hikes immediately ahead.

“The initial yen weakness reflects two dissents and the fact that this was a meeting without an updated outlook report, limiting the BOJ’s ability to reinforce a hawkish message through revised forecasts,” said Masahiko Loo, senior fixed income strategist at State Street Investment Management.

The yen had slipped after the US Federal Reserve hiked rates to 3.75 to 4 per cent earlier this week, and the currency has now fallen further after the BOJ’s rate hike.

Still, Japan’s Nikkei 225 index closed 1.4 per cent higher against this backdrop on Friday, while the Topix ended 0.1 per cent lower.

“The Fed’s hike this week widened the US-Japan rate gap, putting renewed pressure on the yen and increasing pressure on the BOJ to tighten, while renewed energy pressures add to imported inflation risks,” said BlackRock Investment Institute.

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Earlier on Jul 31, the US Treasury had stepped in to buy yen in a bid to prop up a currency that was enduring multi-decade lows. This was the first time the US had intervened to help the battered yen since 1998.

This helped the currency strengthen to about 120 to 121 yen against the Singdollar in early August, though it still weakened to about 123 yen soon after.

Japan also spent a record 15.4 trillion yen (US$98.3 billion) on intervention in the month through Aug 26, a Bloomberg report noted.

Further pressure on the yen

Various analysts said that the yen should experience “limited appreciation” in the near term, given a “well priced in” rate hike by markets ahead of the move. 

Magdalene Teo, fixed income analyst for Asia at Julius Baer, noted how the market has priced in two more rate hikes by July 2027, to bring the policy rate to 1.75 per cent. 

Tai Hui, Asia-Pacific chief market strategist at JPMorgan Asset Management, said that the Fed’s hawkish hike places risks on the narrowing of Japan-US interest rate differentials ahead – potentially pressuring the yen.

“A potential delay to rate hikes also weighs on further appreciation of the Japanese yen,” he added.