Weak Yen Puzzles Markets Despite Rising Interest Rates in Japan

The Japanese yen has been experiencing an unusual phenomenon where it remains weak despite rising interest rates. This is contrary to the general trend, where higher interest rates typically strengthen a currency.

According to Baek Seok-hyun, an economist at Shinhan Bank S&T Center, Japan's interest rate rise is not a 'good' one. The country has been struggling with high government debt, exceeding twice its GDP, and concerns about the government's expansionary fiscal policy have begun to hinder the impact of rising interest rates.

The Bank of Japan faces a dilemma: raising interest rates to control prices and prevent the yen from weakening would increase the government's interest burden, while expanding the purchase of government bonds to prevent rising interest rates on government bonds would be an admission that monetary policy cannot be tightened due to the government's fiscal burden.

This is known as 'Fiscal Dominance', which has contributed to the current weak yen. The Bank of Japan's inability to raise interest rates further, despite rising inflation expectations, has led investors to doubt its ability to continue such high interest rates.