Despite the Bank of Japan raising rates by 0.25 percentage points in September, concerns over fiscal dominance and the government's review of a consumption tax cut on food products have become focal points behind the yen's continued weakness. Markets are focusing on the future policy direction of Japan and the United States, and the effects of intervention may be temporary.
At its monetary policy meeting on 18 September, the Bank of Japan changed its policy rate from 1.0% to 1.25%. However, the dollar-yen exchange rate broke out of the yen appreciation trend that had continued since early September and moved toward a weaker yen. Normally, a rate hike would be expected to support the yen, but the yen weakened on this occasion.
The first reason for the yen's decline was that the U.S. Federal Reserve raised its policy rate to 3.75%-4.0% on 16 September, so the Japan-U.S. interest rate differential did not narrow. The second was that markets are focusing on the future monetary policy outlook in Japan and the United States. Expectations that the Bank of Japan will be unable to continue making substantial rate hikes because of concerns about the economy and fiscal policy have made it difficult to curb yen selling. The presence of a committee member who opposed the rate hike at the policy meeting was also cited as a factor prompting markets to remain wary of rapid rate hikes by the Bank of Japan.
Subsequently, speculation spread that the Bank of Japan would conduct a “rate check,” asking private-sector banks about current foreign exchange rates, bringing the possibility of yen-buying intervention by the government into focus. There is a view that intervention is likely to produce only a short-term yen appreciation effect and that the policies and market expectations underlying the yen's weakness will not change. Concerns are growing that fiscal constraints will make prolonged monetary tightening difficult, drawing attention to fiscal dominance as a factor behind the yen's weakness.
The government's consideration of a review of the consumption tax cut on food products as part of efforts to dispel these concerns has been mentioned as a factor behind the yen's weakness. However, the article does not specify the timing or confirmed effects of any policy implementation.