The Bank of Japan raised rates by 25 basis points today, taking the interest rate to 1.25%. That’s the highest level since 1995. The vote passed 7 to 2, with both dissenting votes cast by commissioners appointed by Prime Minister Hayao Takai
The USD/JPY pair has broken 157 straightaway. When you raise rates, your currency actually depreciates. This is something straight out of a textbook—professors don’t even know how to explain it.
Because the market already knew you were going to raise. The probability of a rate hike priced in by the FX swap market was over 92% before the meeting. So when the hike finally landed, it wasn’t “bullish for the yen”—it was “fully priced.” The yen shorts had been waiting all along, and finally found a moment they could feel comfortable shorting.
More fundamentally, it comes down to the interest-rate differential. Japan raised rates to 1.25%, while the U.S. federal funds rate is 3.75% to 4%. The gap is about 250 to 275 basis points. If you raise by 25 basis points, the differential only narrows a little. After the carry-trade players run the numbers, they find that borrowing yen and buying dollars is still profitable. So they keep borrowing and keep selling the yen.
The Bank of Japan itself also knows this problem. In its statement, it says, “Financial conditions remain accommodative, and real interest rates have been kept at a low level.”
So why raise rates anyway?
In the Middle East, oil prices have broken above 100, with Brent around 104. Japan is an oil importer—when oil prices rise, imported inflation directly pours into the CPI. And the yen is already depreciating, making imports even more expensive. It’s a double squeeze. The Bank of Japan’s statement, in its own words, is: “The impact of rising import prices has begun to show, and the tendency for firms to pass on higher wage costs to sales prices remains ongoing.”
At the same time, U.S. Treasury Secretary Bessent has been publicly pressuring Japan to raise rates and strengthen the yen. At the end of July, the U.S. and Japan even jointly intervened in the FX market, spending $96 billion to buy yen. What happened? A month later, the yen fell back again.
What the market is focused on now is the next move.
At Ueda Kazuo’s press conference, he hinted when the next rate hike might come. A Reuters survey shows the market expects rates to reach 1.5% by March 2027, and 1.75% in the second quarter.
In the Bank of Japan’s statement, there is no clear signal about continuing to hike in October. For the two dissenting-vote commissioners, the reasoning was that “the economic situation is not strong enough.” Capital Economics analyst said the statement amplified the impact of AI demand on inflation. That means even if oil prices fall back, the BOJ’s hawkish bias is unlikely to change easily.
—Clear Stream Channel #日本央行加息至31年高位
The USD/JPY pair has broken 157 straightaway. When you raise rates, your currency actually depreciates. This is something straight out of a textbook—professors don’t even know how to explain it.
Because the market already knew you were going to raise. The probability of a rate hike priced in by the FX swap market was over 92% before the meeting. So when the hike finally landed, it wasn’t “bullish for the yen”—it was “fully priced.” The yen shorts had been waiting all along, and finally found a moment they could feel comfortable shorting.
More fundamentally, it comes down to the interest-rate differential. Japan raised rates to 1.25%, while the U.S. federal funds rate is 3.75% to 4%. The gap is about 250 to 275 basis points. If you raise by 25 basis points, the differential only narrows a little. After the carry-trade players run the numbers, they find that borrowing yen and buying dollars is still profitable. So they keep borrowing and keep selling the yen.
The Bank of Japan itself also knows this problem. In its statement, it says, “Financial conditions remain accommodative, and real interest rates have been kept at a low level.”
So why raise rates anyway?
In the Middle East, oil prices have broken above 100, with Brent around 104. Japan is an oil importer—when oil prices rise, imported inflation directly pours into the CPI. And the yen is already depreciating, making imports even more expensive. It’s a double squeeze. The Bank of Japan’s statement, in its own words, is: “The impact of rising import prices has begun to show, and the tendency for firms to pass on higher wage costs to sales prices remains ongoing.”
At the same time, U.S. Treasury Secretary Bessent has been publicly pressuring Japan to raise rates and strengthen the yen. At the end of July, the U.S. and Japan even jointly intervened in the FX market, spending $96 billion to buy yen. What happened? A month later, the yen fell back again.
What the market is focused on now is the next move.
At Ueda Kazuo’s press conference, he hinted when the next rate hike might come. A Reuters survey shows the market expects rates to reach 1.5% by March 2027, and 1.75% in the second quarter.
In the Bank of Japan’s statement, there is no clear signal about continuing to hike in October. For the two dissenting-vote commissioners, the reasoning was that “the economic situation is not strong enough.” Capital Economics analyst said the statement amplified the impact of AI demand on inflation. That means even if oil prices fall back, the BOJ’s hawkish bias is unlikely to change easily.
—Clear Stream Channel #日本央行加息至31年高位