Yen near four-decade lows despite BOJ rate hike

The Japanese currency edged up 0.2% against the U.S. dollar at 161.12 yen

The yen was pinned near four-decade lows on Friday, ‌with ​markets on heightened intervention watch as a rate hike in Japan nor an Iran-U.S. peace deal managed to arrest its prolonged decline.

The Japanese currency edged up 0.2% against the U.S. dollar at 161.12 yen, steadying after declining to a two-year low on Thursday. Most other currencies were little changed as shipping in the Strait of Hormuz returned to normal after the signing of the Iran-U.S. peace deal earlier this week, though question marks remain over whether the truce will hold.

Large speculative yen short positions have not eased despite the BOJ’s rate hike this week, analysts from DBS wrote in a research report. Japan’s tolerance for yen weakness appears close to its limit, the note added. Policymakers may deploy both rhetoric and further market ⁠interventions to ​curb yen depreciation, with falling oil prices also offering ⁠some support to the currency.

Japan’s annual core inflation stayed below the central bank’s 2% target for a fourth straight month in May, data showed on Friday, as fuel subsidies offset rising raw material costs from the Middle East ⁠war.

While the government’s fuel price caps have so far kept a lid on consumer prices, we expect the pass-through of higher energy costs to utilities charges and other goods and services to lift inflation to around ​3.5% by early-2027, analysts from Capital Economics wrote in a research note.

Minutes from the central bank’s meeting in April released on Friday and comments from BOJ Deputy Governor ⁠Ryozo Himino earlier also cautioned about the risks of more rate hikes tied to the inflationary impulse from the Iran war.

Our view is that Japan’s Ministry of Finance will likely defend the 161.95 level the first couple of times it’s ⁠tested, deploying ​similar firepower to what we saw in April and May — around 11.7 trillion yen, said Tony Sycamore, market analyst at IG in Sydney.

That would mean they would have used roughly 11–12% of their total reserves in a relatively short period, with little noticeable impact, he added. At that stage, they would need to become far more selective with future interventions to preserve flexibility and credibility, keeping ⁠plenty of ammunition in reserve.