BoJ Policy Paradox: Yen Weakness Persists Despite Historic Rate Hike to 0.75%

The Bank of Japan (BoJ) finds itself trapped in a policy nightmare. Despite executing a historic rate hike to 0.75% in December—the highest level in 30 years—the Japanese Yen (JPY) remains under severe pressure, hovering near intervention danger zones around 157-160 against the Dollar.

The “Bond-Currency Double Kill”

October meeting minutes released Wednesday reveal deep internal divisions that preceded the hike. While hawks argued for normalization, the market's reaction has been brutal: a selloff in both JGBs (pushing 10-year yields above 2%) and the Yen. This “debt-currency” spiral reflects eroding confidence in Japan's fiscal sustainability as the government passes record budgets exceeding 120 trillion yen while simultaneously tightening monetary conditions.

Intervention Threat Looms

Finance Minister Satsuki Katayama has escalated verbal warnings, asserting the government has a “free hand” to take bold action against speculative moves. Markets interpret 160 as the critical line in the sand for physical intervention. However, structural outflows—driven by a massive trade deficit and Japanese corporates hoarding profits overseas—suggest that unilateral intervention may only offer temporary respite without a fundamental shift in the US-Japan real rate differential.

Contrast with RMB

In sharp contrast, the Chinese Yuan (RMB) has strengthened, acting as an outlier in Asia. Driven by year-end corporate settlement flows and a trade surplus, the RMB has decoupled from the sliding Yen and Won, pushing the RMB/JPY exchange rate to record highs.