BOJ holds rates at 1% as yen intervention tests Tokyo's resolve

The Bank of Japan held its policy rate at 1% Friday in an 8-1 vote, even as a coordinated yen-buying intervention and a hawkish outlook report kept the tightening path intact.

"The BOJ's slight upward revision to its economic outlook provides additional justification and support for the rate-hike process," said Kazutaka Maeda, senior economist at Meiji Yasuda Research Institute.

The dollar rose 0.81% to 160.76 yen Friday after Thursday's 2.4% plunge — the biggest single-day drop since January 2023 — as markets tested Tokyo's resolve following the intervention. The 10-year JGB yield edged up 0.5 basis points to 2.800% in early Tokyo trade. Board member Hajime Takata dissented, arguing for a 25-basis-point increase to 1.25%.

The decision follows the BOJ's June rate hike and comes as markets price only one additional full rate hike by year-end. Most analysts polled by Reuters expect the central bank to lift rates to 1.25% by December, but the intervention's timing suggests the government may resist hikes driven by yen weakness.

Intervention Buys Time, Not a Trend

Japan conducted yen-buying, dollar-selling intervention in the New York session overnight, a market source told Reuters, pulling the currency from four-decade lows. In a rare coordinated move, South Korea also conducted dollar-selling intervention Thursday, sending the won to a nine-month high before it pared gains to 1,438.1 per dollar, down more than 1 percent.

Japan's top foreign exchange diplomat said Friday that Tokyo was receiving support from the United States that "goes beyond psychological support." Speculators have amassed large bearish bets on the yen, with weekly data from a U.S. regulator showing net short positions worth $11.65 billion, near the highest in two years.

"If you're holding a leveraged position, 450 to 500 pip rip to the downside against you, it's going to hurt," said Chris Weston, head of research at Pepperstone.

But the intervention's effect may be short-lived. "Intervention only buys time," Maeda said. "If the underlying weak yen trend remains unchanged, discussion will naturally return to further rate hikes."

Markets Price One More Hike by Year-End

The BOJ said it would continue to raise interest rates in response to economic, price and financial developments, and would consider the timing and pace of rate hikes while assessing the baseline scenario, risks and impact of Middle East developments. The outlook report was notably hawkish: for the first time, the board said "underlying inflation" could rise above its 2 percent target.

"We're sticking to our non-consensus view that the central bank will lift interest rates to 2 percent by the end of next year," said Marcel Thieliant, head of Asia-Pacific at Capital Economics. "The central bank still believes that risks to inflation are tilted to the upside."

Yuxuan Tang, Asia head of rates and FX strategy at J.P. Morgan Private Bank, said markets currently price only one additional full rate hike by year-end. "On the BOJ's explicit mandates of inflation and economic activity, the case for materially tighter policy remains limited," Tang said.

The last time the BOJ raised rates in June, the yen strengthened briefly before resuming its slide. The slow pace of hikes has been blamed for pushing the yen to a 40-year low, and the BOJ's next policy meeting will be closely watched for whether the intervention changes the calculus.

"I think only one dissent vote suggests that there's not yet widespread views among the BOJ officials that a hike is necessary," said Naka Matsuzawa, chief macro strategist at Nomura Securities. "So that will take off some of the effect of the currency intervention."

The BOJ's next meeting comes as the Federal Reserve's decision to leave rates unchanged bruised the dollar, with traders questioning whether the Fed's new chief is serious about containing inflation. If the yen resumes its slide, pressure on the BOJ to accelerate the pace of hikes will intensify — Maeda expects the cadence, roughly once every six months, to quicken.

This article is for informational purposes only and does not constitute investment advice.