On September 18, the Bank of Japan raised its target for the short-term policy interest rate from 1.00% to 1.25%, with 7 votes in favor and 2 against. The two dissenting members, Asada and Sato, believe that consumer price inflation is still below 2%, and that neither growth nor prices have accelerated to a degree that would warrant another rate hike. At 1.25%, the rate is the highest since 1995—hence the origin of the “31-year high.”
The most counterintuitive part is this: once the rate hike was implemented, the yen actually fell by about 1.2%. The USD/JPY pair even briefly approached the psychological level of 158–160, returning to the spotlight.
Why can’t the rate hike stop the depreciation? Because what markets trade is never simply “how much was raised this time,” but rather “whether hikes will continue from here.” Ueda Kazuo clearly stated that there would be no pre-set timetable, that it was hard to determine the terminal interest rate, and he also emphasized that monetary policy is not meant to control the yen exchange rate. This wording was summarized by the sell-side as a “hawkish rate hike with a dovish cue”—hawkish in action, dovish in guidance.
What matters to us is the transmission mechanism. As Japanese interest rates rise, in theory they tighten the world’s largest carry-trade channel: borrowing yen and buying high-yield assets. Once that channel reverses and carry positions unwind, the shock is not only to the yen, but to all leveraged risk assets. August 2024 was a ready-made example. But this time the yen weakened, suggesting carry trades were not forced to retreat—and instead, pressure on the funding side eased. Around the same time, $BTC hovered near $81,000, rebounding by more than 30% from the year-to-date low of $57,800 in July.
My view is cautiously optimistic: in the short term, this looks more like a false alarm, because the policy path has not been locked in. The increase in funding costs is gradual rather than a cliff-like jump. What should really be watched is not this particular level, but whether the 160 threshold will be breached— and whether Japan’s 10-year government bond yield will climb further. That would be the kind of trigger that could switch on cross-market deleveraging.
So let me ask one question: can this line at 160 hold this time? If it can’t, which type of position do you plan to adjust first?
# Bank of Japan raises rates to a 31-year high
The most counterintuitive part is this: once the rate hike was implemented, the yen actually fell by about 1.2%. The USD/JPY pair even briefly approached the psychological level of 158–160, returning to the spotlight.
Why can’t the rate hike stop the depreciation? Because what markets trade is never simply “how much was raised this time,” but rather “whether hikes will continue from here.” Ueda Kazuo clearly stated that there would be no pre-set timetable, that it was hard to determine the terminal interest rate, and he also emphasized that monetary policy is not meant to control the yen exchange rate. This wording was summarized by the sell-side as a “hawkish rate hike with a dovish cue”—hawkish in action, dovish in guidance.
What matters to us is the transmission mechanism. As Japanese interest rates rise, in theory they tighten the world’s largest carry-trade channel: borrowing yen and buying high-yield assets. Once that channel reverses and carry positions unwind, the shock is not only to the yen, but to all leveraged risk assets. August 2024 was a ready-made example. But this time the yen weakened, suggesting carry trades were not forced to retreat—and instead, pressure on the funding side eased. Around the same time, $BTC hovered near $81,000, rebounding by more than 30% from the year-to-date low of $57,800 in July.
My view is cautiously optimistic: in the short term, this looks more like a false alarm, because the policy path has not been locked in. The increase in funding costs is gradual rather than a cliff-like jump. What should really be watched is not this particular level, but whether the 160 threshold will be breached— and whether Japan’s 10-year government bond yield will climb further. That would be the kind of trigger that could switch on cross-market deleveraging.
So let me ask one question: can this line at 160 hold this time? If it can’t, which type of position do you plan to adjust first?
# Bank of Japan raises rates to a 31-year high