BOJ Rate Hike Fails to Boost Yen Amid Wide Interest Rate Gap

The Japanese yen has weakened due to the wide interest rate gap between Japan and the US. Despite the Bank of Japan's (BOJ) recent 25-basis-point rate hike, analysts believe that the yen may not see significant gains.

The BOJ raised its policy rate to 1.25% on September 18, its highest level in 31 years. This move came two days after the US Federal Reserve increased its benchmark interest rate by 25 basis points to a range of 3.75% to 4%. The yen has fallen about 1.2% against the US dollar and 1.1% against the Singdollar.

Josh Gilbert, lead analyst for Asia-Pacific and the Middle East at trading platform eToro, stated that the BOJ's decision was expected but its split vote has raised doubts over how quickly it will tighten policy further. He noted that the US Fed's recent rate hike means the gap between US and Japanese borrowing costs is narrowing too slowly to support the yen significantly.

Echoing Gilbert's sentiment, Maybank Group head of foreign exchange research Saktiandi Supaat said that a sustained recovery in the yen would require markets to price in a faster pace of rate increases. He noted that the immediate impact of BOJ's rate hike is likely to be limited but it should provide some support for the yen over time by raising the cost of borrowing the currency.