Yen extends declines after Bank of Japan hikes rates with two dissents

The Japanese yen slipped as much as 0.9% against the US dollar after the Bank of Japan raised interest rates, as anticipated, with two dissenting board members casting doubts on future policy tightening. Japan's currency plummeted to 157.33 per greenback, while shorter-term bond yields fell. Despite the prediction by all surveyed economists, only two members, Toichiro Asada and Ayano Sato, dissented.

Following the decision, the yen recovered slightly, trading 0.5% lower at 156.75 per US dollar after BOJ Governor Kazuo Ueda stated that the policy-setting stage had shifted. He cautioned about potential upside price risks and emphasized the need for thorough debate during each meeting. The outcome was deemed insufficiently hawkish for markets, which may push USD/JPY higher and front-end JPY yields lower, according to Chidu Narayanan, a chief Asia-Pacific strategist at Wells Fargo.

The Nikkei 225 rose 1.4% as the yen weakened, while the Topix index remained unchanged due to the negative impact of financial shares. Japanese government bonds showed mixed results. The BOJ's rate hike followed the US Federal Reserve's hawkish interest rate hike earlier in the week, which weakened the yen and reversed a September rally fueled by expectations of stronger tightening, a reduction in yen-funded carry trades, and speculation of pension funds investing more in domestic assets.

Strategists predict the US dollar-yen could climb towards 160 if investors believe the BOJ's tightening pace will lag behind the Fed's. Intervention risks resurfaced as Japan and the US conducted their first coordinated yen-buying operation since 1998. Officials have emphasized the speed and disorderliness of currency moves rather than specific levels, but another push towards 160 could test their tolerance.

US Treasury Secretary Scott Bessent has signaled support for a stronger yen, potentially discouraging traders from rebuilding bearish positions.