The Lombard Review
World

Japan raised rates. The yen fell anyway

Carry dominates signalling

A Bank of Japan convertible yen banknote from 1900
A Bank of Japan convertible yen banknote from 1900Photo: PHGCOM / Wikimedia Commons, CC BY-SA 3.0
1 min read Data: USDJPY ~151

The Bank of Japan delivered its first interest rate increase in seventeen years, yet the immediate market response was a counterintuitive slide in the domestic currency. The yen weakened past 151 per dollar, brushing multi-decade lows. Foreign exchange markets offered a masterclass in separating symbolic policy milestones from prevailing carry dynamics.

A $100,000 gold certificate, the largest U.S. note ever printed
A $100,000 gold certificate, the largest U.S. note ever printedPhoto: BrayLockBoy / Wikimedia Commons, Public domain

The Unforgiving Carry Spread

Even with the BoJ lifting rates above zero, the interest rate differential between the United States (5.3 per cent) and Japan (0.1 per cent) remains an enormous chasm exceeding 500 basis points. Because Kazuo Ueda committed to keeping monetary conditions broadly accommodative, the incentive for institutional capital to borrow yen and harvest yield overseas remains completely intact. Rate hikes without tightening do not defend a currency.

The Bureau of Engraving and Printing, which prints U.S. currency
The Bureau of Engraving and Printing, which prints U.S. currencyPhoto: Harrison Keely / Wikimedia Commons, CC BY 4.0

The yen’s post-hike slide demonstrates that symbolic rate increases cannot defeat a 500-basis-point carry spread; carry will continue to crush the currency until Tokyo closes the yield gap.