Yen falls to near four-decade low despite Bank of Japan rate hike

SINGAPORE: The yen remained near four-decade lows on Friday, keeping markets on watch for possible intervention after a Bank of Japan rate hike failed to stop the currency’s decline.

The yen was 0.1% stronger at 161.205 against the US dollar, steadying after falling to a two-year low on Thursday. Trading remained thin because of holidays in the United States and parts of Asia.

The Japanese currency has received limited support despite dollar-selling intervention by Japan’s Ministry of Finance earlier this year and the Bank of Japan raising interest rates to a 31-year high last week.

Concerns over spending plans by Japanese Prime Minister Sanae Takaichi have also weighed on investor confidence and increased speculation that authorities may intervene again.

Tony Sycamore, market analyst at IG in Sydney, said Japan’s Ministry of Finance was likely to defend the 161.95 level initially, using intervention on a scale similar to April and May, when around ¥11.7 trillion was deployed.

He said such intervention would mean Japan had used around 11% to 12% of its total reserves within a short period, with limited impact, forcing authorities to be more selective in future action.

Data released on Friday showed Japan’s annual core inflation remained below the Bank of Japan’s 2% target for a fourth consecutive month in May, as fuel subsidies offset higher raw material costs linked to the Middle East conflict.

Capital Economics analysts said government fuel price caps had contained consumer prices so far, but expected higher energy costs to lift inflation to around 3.5% by early 2027.

Minutes of the Bank of Japan’s April meeting showed some board members favoured faster interest rate increases if the Middle East conflict persisted, to prevent underlying inflation from overshooting.

Bank of Japan Deputy Governor Ryozo Himino also said on Friday that the central bank would continue raising interest rates while monitoring the risk of underlying inflation exceeding its 2% target.

Most other major currencies were little changed in Asian trading as shipping through the Strait of Hormuz returned to normal after the signing of a US-Iran peace deal earlier this week, although questions remained over whether the truce would hold.

The US dollar index, which measures the greenback against six major currencies, held at 100.81 after rising 0.5% to a one-year high on Thursday.

The pound was flat at $1.3205 after the Bank of England kept interest rates unchanged at 3.75% on Thursday, saying it was too early to raise rates given uncertainty over inflation pressures.

Traders were also awaiting the result of a by-election contested by Greater Manchester Mayor Andy Burnham, who could challenge Prime Minister Keir Starmer for the Labour Party leadership if he wins.

The euro was unchanged at $1.1459. The Australian dollar slipped 0.1% to $0.7011, while the New Zealand dollar was steady at $0.5756.

Bitcoin fell 0.2% to $62,868.18, while ether was unchanged at $1,708.98.