Yen Suffers Worst Day In 2026 Despite BoJ Hiking Rates To 31-Year High: Here's Why
The Bank of Japan raised its key interest rate Friday as expected, lifting its benchmark from 1% to 1.25%—its highest level since 1995. Despite the move, the yen suffered its worst daily drop in nine months. The dollar jumped 1.2% against the currency to a two-week high of 157.84 yen. That's its largest daily gain since December and its biggest weekly rally since September 2024. The Message Did The Damage The decision was split 7-2, with board members Toichiro Asada and Ayano Sato dissenting. Both are seen as reflationists and were appointed by Prime Minister Sanae Takaich i earlier this year. Governor Kazuo Ueda reaffirmed the central bank's commitment to further rate hikes as economic conditions evolve. However, traders seized on his dovish caveat that monetary policy will remain accommodative enough to support growth. The hike itself was fully priced into currency and bond markets beforehand. As a result, the market read the new information as dovish. "They've just clearly underwhelmed versus expectations here," said Ray Attrill, head of FX strategy at National Australia Bank. Inflation data that morning pointed the same way. Core inflation, which strips out fresh food prices, e
25%—its highest level since 1995. Despite the move, the yen suffered its worst daily drop in nine months. 84 yen. That's its largest daily gain since December and its biggest weekly rally since September 2024.
The Message Did The Damage The decision was split 7-2, with board members Toichiro Asada and Ayano Sato dissenting. Both are seen as reflationists and were appointed by Prime Minister Sanae Takaich i earlier this year. Governor Kazuo Ueda reaffirmed the central bank's commitment to further rate hikes as economic conditions evolve. However, traders seized on his dovish caveat that monetary policy will remain accommodative enough to support growth.
The hike itself was fully priced into currency and bond markets beforehand. As a result, the market read the new information as dovish. "They've just clearly underwhelmed versus expectations here," said Ray Attrill, head of FX strategy at National Australia Bank. Inflation data that morning pointed the same way.
8% in July — the first slowdown in four months. 75%. S. 75%-4%, its first increase since 2023, in a unanimous 12-0 vote.
The updated dot plot showed 16 of 18 participants expecting another increase this year. 5 percentage points between what a dollar deposit earns and what a yen deposit earns. The carry trade runs on exactly that spread: borrow cheaply in yen, convert to dollars, collect the higher yield. A quarter-point hike in Tokyo does not close a gap that wide, and a Fed still tightening reopens it.
-Japan intervention to support the yen in late July. The currency had rallied to a seven-month high in early September on bets the BoJ would deliver a run of hikes. Those bets are now being unwound. 1% lower in premarket trading on Friday.
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