Yen Falls as Hawkish Central Banks Leave Japan Behind

The yen came under pressure on Tuesday as investors anticipated that Japan's central bank will struggle to keep pace with other major global banks, which have turned hawkish. This has led to a wider interest rate gap between Japan and its peers.

The Bank of Japan hiked rates last Friday, but two of the nine Monetary Policy Committee members dissented, casting doubt on the BOJ's ability to tighten policy as quickly as other central banks.

Currency markets have been volatile since the Bank of Japan's decision, with the yen slipping to 157.47 against the dollar in Asia trading. The US Federal Reserve also hiked rates last week, and most global central banks are sounding hawkish, leading investors to price in more rate increases this year.

Currency analyst Carlos Casanova at Union Bancaire Privée notes that unless the BOJ tightens policy more rapidly than the Fed, the large US-Japan interest rate differential will continue to support yen-funded carry trades.