Yen Plummets as Bank of Japan Official Calms Rate Hike Fears

The Japanese yen fell sharply on Wednesday after a key Bank of Japan (BOJ) official downplayed the likelihood of an imminent rate hike, easing investor concerns over market volatility.

The yen dropped approximately 2.5% to a session low of 147.94 per US dollar following comments from BOJ Deputy Governor Shinichi Uchida. The dollar was last up 1.9% at 147.06 yen.

“Given the sharp volatility in domestic and overseas financial markets, it’s necessary to maintain current levels of monetary easing for now,” Uchida said.

Uchida’s remarks contrasted with BOJ Governor Kazuo Ueda’s hawkish stance last week when the BOJ unexpectedly raised interest rates, boosting Japanese stocks.

The BOJ’s rate hike, coupled with Tokyo’s intervention in early July, led to a sell-off in carry trades, where traders borrow yen at low rates to invest in higher-yield assets. This unwinding, combined with weak US jobs data and concerns about an artificial intelligence bubble, caused global stocks to tumble, starting with a 12% drop in Japanese equities on Monday.

Alvin Tan, head of Asia FX strategy at RBC Capital Markets, commented, “The BOJ’s hawkish turn last week may have been a policy error. Japan’s economy is struggling, especially domestic demand.”

The dollar index rose 0.18% to 103.16, moving further from the seven-month low of 102.15 reached on Monday.

Rong Ren Goh, a portfolio manager at Eastspring Investments, noted, “Uchida has saved the carry trade – for now. Japan’s policy is a key part of the market’s overall risk structure.”

The yen’s decline was widespread, with the Mexican peso, New Zealand dollar, and Australian dollar all gaining against the currency. The Swiss franc, another carry trade funding currency, dropped 1.1% to 0.8612 per dollar. The euro eased 0.1% to $1.0919, and sterling rose 0.27% to $1.2727.

Traders adjusted their expectations for Federal Reserve rate cuts, now anticipating 100 basis points of easing this year and a 62% chance of a 50 basis point cut in September.

The Australian dollar was up 0.67% at $0.6563 after the central bank ruled out an interest rate cut this year. The New Zealand dollar rose 1.05% to $0.6017 following strong jobs data.