Yen Loses Ground as Traders Doubt BOJ's Rate-Hike Ambition

The Japanese yen has continued its decline against the US dollar, falling to around 157.70 on September 22. This marks the third consecutive session of losses for the currency.

The reason behind this drop is a growing concern among traders that the Bank of Japan (BOJ) is not hiking rates quickly enough. Just four days prior, the BOJ raised its policy rate by 25 basis points to 1.25%, the highest level in 31 years. However, the market response was lukewarm.

The BOJ's decision was a 7-2 vote, with two board members dissenting against the rate hike. Governor Kazuo Ueda framed the move as the start of a 'new phase' focused on preventing inflation from overshooting. He left the door open for further hikes if conditions warranted it.

The yield gap between the US and Japan remains significant, standing at approximately 275 basis points. As long as this spread persists, traders have an incentive to borrow yen and invest in higher-yielding currencies.