The Japanese Yen (JPY) came under heavy selling pressure on Friday, weakening sharply against the U.S. Dollar (USD) after the Bank of Japan’s latest interest rate decision. USD/JPY surged nearly 1.20% to around 157.48 at the time of writing, marking its highest level since November 21.
During the Asian session, the Bank of Japan raised its policy rate by 25 basis points to 0.75%, taking borrowing costs to their highest level in nearly 30 years. The central bank noted that Japan’s economy continues to recover at a moderate pace, supported by tight labor market conditions and solid corporate profitability, which are contributing to steady wage growth.
Policymakers also highlighted a gradual pickup in underlying inflation, driven in part by companies passing higher labor costs on to consumers. This trend has boosted confidence that inflation can be sustained around the BoJ’s 2% price stability target over time.
Despite the rate hike, the BoJ emphasized that real interest rates remain deeply negative and that accommodative financial conditions will continue to underpin economic activity. The central bank reiterated that future policy adjustments will depend on developments in economic growth, inflation, and financial conditions, signaling a cautious and data-dependent approach to further tightening.
In response to the decision, Japanese Government Bond (JGB) yields moved higher, with the benchmark 10-year yield climbing above 2.0% for the first time since 1999. The rise in yields has revived concerns over Japan’s elevated public debt levels, as higher borrowing costs could gradually increase the government’s debt-servicing burden.
Meanwhile, Japanese officials renewed their focus on currency market movements. The BoJ stated that it would closely monitor developments in financial and foreign exchange markets as part of its ongoing policy assessment. Separately, Japan’s Finance Minister, Satsuki Katayama, warned that authorities stand ready to take appropriate action against excessive currency fluctuations.
A relatively firm U.S. Dollar has added further pressure on the Yen, although expectations that the Federal Reserve may begin easing monetary policy in the coming months could limit additional upside in the Greenback.
On the data front, U.S. consumer sentiment softened in December. The University of Michigan’s Consumer Expectations Index was revised down to 54.6 from 55.0, while the headline Consumer Sentiment Index was finalized at 52.9. Inflation expectations showed mixed signals, with one-year expectations edging up to 4.2%, while the five-year outlook remained unchanged at 3.2%.
Overall, the Yen’s sharp decline highlights market skepticism over the pace of further BoJ tightening, even as Japan moves away from its long-standing ultra-loose monetary policy stance.
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