Yen Weakens Past 157 Per Dollar Even After the Bank of Japan Raises Rates to 1.25%

The Bank of Japan raised its policy rate by a quarter point to 1.25% on Friday. The currency initially moved in the opposite direction from what a rate increase normally produces: the yen weakened past 157 per dollar and Japanese equities rose, as traders judged the decision less hawkish than hoped.

The vote explains why. The board split seven to two, with Toichiro Asada and Ayano Sato, both appointed under Prime Minister Sanae Takaichi, preferring to hold rates steady. Traders read that split as evidence the majority favouring increases could narrow and that the pace of future increases could slow.

The currency then reversed course. The Nikkei newspaper reported Friday afternoon that the Bank of Japan had conducted a "rate check" with financial institutions, contacting them to confirm exchange-rate levels, a step that in past episodes has preceded direct intervention. The yen pared its losses after the report, trading around ¥156.75 per dollar, having lost as much as 1.3% earlier in the session. The report followed a joint US-Japan intervention roughly two months ago, when the yen touched its weakest level in decades, and US Treasury Secretary Scott Bessent has publicly urged the Bank of Japan to tighten faster.

The underlying problem remains numerical, not just rhetorical. With the Federal Reserve signalling further increases, a quarter-point rise in Tokyo does not close an interest-rate gap that remains wide, so the incentive to borrow yen and buy dollar assets remains in place even after a rate check narrows the gap traders are willing to test.

Elsewhere in Asia, governments are managing the dollar's strength directly. The Indian rupee ended several days of declines and closed at 95.87 after the Reserve Bank of India sold dollars and crude oil prices retreated, a combination that steadied the currency without addressing the interest-rate gap driving it.