The Japanese yen strengthened toward 160 per dollar on Tuesday, rebounding from the previous session’s decline after the Bank of Japan implemented a widely expected 25 basis point rate hike, raising its benchmark interest rate to 1%. The decision underscored policymakers’ determination to tackle inflation risks associated with the conflict in Iran and to lend support to the persistently weak currency.
Still, the move was not unanimous. Some board members opposed the hike, with Toichiro Asada contending that downside risks to growth and employment outweigh the upside risks to inflation.
The yen has come under sustained pressure in recent weeks as traders expanded short positions, driven by heavy carry trade activity in which investors borrow in the low-yielding Japanese currency to invest in higher-yielding assets abroad. This dynamic stems from the still-wide interest rate differential between Japan and the United States, which has largely blunted the impact of the BOJ’s gradual tightening and repeated intervention efforts by authorities in Tokyo.
