On June 17, the Bank of Japan raised its benchmark interest rate to 1% for the first time in 31 years. However, the yen's value fell, nearing 161 yen per dollar, marking its highest level in nearly two years. The U.S. Federal Reserve's recent signals during the Federal Open Market Committee (FOMC) meeting overshadowed the impact of Japan's rate hike. The foreign exchange market is now speculating about the possibility of further yen-buying interventions by the Japanese government and the Bank of Japan.
According to the Nihon Keizai Shimbun (Nikkei), the yen's exchange rate reached as high as 160.79 yen per dollar in New York's foreign exchange market early on June 18. This surpassed the 160.72 yen per dollar recorded just before the Japanese government and the Bank of Japan intervened to buy yen on April 30. As a result, the yen's value has dropped to its lowest level since July 2024, and the trend continued in Tokyo's foreign exchange market, where the yen fluctuated in the mid-160s against the dollar in the afternoon.
The yen's decline was exacerbated by the FOMC meeting held on June 16-17. Although the Fed decided to keep interest rates unchanged, the market focused on the shift in future rate expectations. In March, a rate cut was anticipated within the year, but the outlook has now shifted to suggest a possible rate hike. As expectations for a rate cut in the U.S. diminished and the likelihood of further increases grew, demand for the dollar surged.
This was also the first FOMC meeting under new Chair Kevin Warsh, who took office in May. While there were speculations that Warsh, appointed by President Donald Trump, might lean towards rate cuts, the outcome was different. The meeting emphasized a strong message of price stability, with the FOMC statement including the phrase "achieving price stability."
Nikkei reported on June 18 that the meeting was perceived as more hawkish than expected by the market. Shogo Kariya, a strategist at Minato Bank, noted that Warsh did not give the impression of being influenced by President Trump. Rinto Maruyama, a senior interest rate and foreign exchange strategist at SMBC Nikko Securities, stated, "If the solid performance of the U.S. real economy continues and expectations for rate hikes increase, the dollar will likely remain strong against other currencies going forward."
The dollar's strength has spread beyond the yen to other major currencies. The euro fell to around 1.147 dollars, its lowest level since late March. The dollar index, which measures the dollar's value against major currencies, rose by about 1% to 100.5, reaching its highest level since late March.
Meanwhile, the impact of the Bank of Japan's rate hike has been limited. On June 16, the Bank raised its policy rate from approximately 0.75% to around 1.0%. This marks the first time Japan's benchmark rate has reached 1% since 1995. However, the hike was largely anticipated by the market, with over 90% already priced in, limiting its effectiveness in strengthening the yen. Instead, the heightened expectations for further U.S. rate hikes have contributed to a perception that the interest rate gap between the U.S. and Japan may widen again, further weakening the yen.
As a result, the possibility of foreign exchange market intervention by Japanese authorities has resurfaced as a key variable. The Japanese government and the Bank of Japan intervened to buy yen on April 30 when the exchange rate reached the 160 yen mark, temporarily lowering it to around 155 yen per dollar. According to the Japanese Ministry of Finance, the scale of yen-buying intervention from late April to late May reached a record 11.7349 trillion yen. However, within a month, the exchange rate has surpassed the pre-intervention levels, effectively nullifying the impact of that intervention.
Japanese Finance Minister Satsuki Katayama stated at a press conference following a Cabinet meeting on June 9 that the government is "always prepared to take decisive action" regarding yen depreciation. Nikkei reported that on June 19, when U.S. financial markets are closed, trading participation may decrease, leading to lower liquidity, which raises the possibility of intervention by Japanese authorities at that time.
Daisaku Ueno, chief foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities, remarked, "The demand for dollar purchases driven by real needs is quite strong. If there is no intervention, we may see a trend testing the yen's lowest level against the dollar, which was recorded at 161.90 yen in July 2024." With no clear catalysts for a yen rebound, the potential for further intervention by Japanese authorities is likely to remain a key factor in the foreign exchange market for the foreseeable future.
* This article has been translated by AI.
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