The Bank of Japan’s rate check was reported just before the long holiday period, as strong downward pressure on the yen against the dollar continues. The article explains why yen weakness has not abated despite the Bank of Japan raising its policy rate to 1.25% at its policy meeting on 18 September, as well as the impact of the rate check on the market.
A sharp move in USD/JPY toward a stronger yen in the early hours of 19 September was reported, with the Bank of Japan’s “rate check” cited as a factor. Despite the Bank of Japan raising its policy rate to 1.25% at the previous day’s monetary policy meeting, yen weakness was said to have continued, drawing attention to the potential for future currency intervention and its impact on the stock market.
A rate check is an action in which the Bank of Japan asks major financial institutions for current exchange-rate levels, places actual buy or sell orders, and then reports “nothing.” It is described as a preparatory stage just short of intervention and is said to heighten market awareness of the possibility of intervention.
Multiple factors are said to have contributed to the current period of yen weakness, including the widening Japan-US interest-rate differential, the outflow of retail money overseas, dollar buying during periods of geopolitical risk, and speculative positioning. The view was expressed that yen weakness has continued even as the Bank of Japan proceeds with rate hikes.
Market participants explained that the interest-rate differential is considerably wider at the current USD/JPY level than when the pair was previously around ¥164, and expressed the view that rate hikes alone would not be enough to curb further yen weakness. Some also pointed out that the latest move strengthened the market’s perception that a rate check had been conducted.