Yen Consolidates Amid Holiday-Thinned Trading

The Japanese yen consolidated near 157 per dollar on Monday after falling more than 2% last week, with traders remaining on alert for possible intervention as Japan begins a three-day holiday. Tokyo has previously used periods of thin holiday liquidity to intervene in currency markets, while concerns were heightened by reports that the Bank of Japan conducted a rate check with market participants late Friday. The yen weakened sharply last week after the BOJ raised interest rates in a widely anticipated move, with two policymakers dissenting from the decision. Governor Kazuo Ueda said the BOJ remains committed to raising rates and adjusting the degree of monetary accommodation in response to changing economic conditions, while noting that accommodative conditions are expected to remain in place to support growth. The yen also came under pressure from expectations that Japan’s rate-hiking cycle could move more slowly than the Federal Reserve’s.

The Japanese yen weakened past 157 per dollar on Friday, hitting two-week lows after the Bank of Japan raised interest rates in a widely telegraphed move, with two officials dissenting to the decision. Traders also parsed Governor Ueda's post-meeting comments, saying the BOJ remains committed to raising rates and adjusting the extent of monetary accommodation based on evolving economic conditions. However, Ueda added that easy monetary conditions are expected to be maintained to support economic growth. The central bank lifted its policy rate by 25 bps to 1.25%, the highest since April 1995, as policymakers seek to curb persistent inflationary pressures. The hike was opposed by board members Asada and Sato, highlighting some resistance to a quicker tightening cycle. The yen also faced pressure from bets that Japan’s rate-tightening cycle could lag behind the Fed’s pace of increases, following the US central bank’s hawkish rate hike earlier this week.

The Nikkei 225 Index advanced 1.38% to finish at 65,019 on Friday, extending its winning streak to three sessions after the Bank of Japan raised its policy rate by 25 basis points to 1.25% in a widely telegraphed move. The decision was not unanimous, however, as board members Toichiro Asada and Ayano Sato opposed the increase, signaling some resistance to a more rapid pace of policy tightening. Despite the dissent, Governor Kazuo Ueda said at the post-meeting press conference that the BOJ remains prepared to raise rates further and adjust the level of monetary easing as economic conditions evolve. Meanwhile, official data showed Japan’s core inflation slowing to 1.7% in August from 1.8% in July, its first decline in four months. Technology and AI-related shares led the gains, with Kioxia (9.4%), SoftBank Group (1.1%), Advantest (6%), Lasertec (8.7%), and Taiyo Yuden (4.2%) among the notable advancers. Japanese markets will be closed from September 21 to 23 for national holidays.