Yen's slide persists despite BOJ rate hike to 31-year high

Despite the Bank of Japan raising interest rates to a 31-year high of 1% and signaling further hikes, the yen continues to defy fundamentals and weaken. The 10-year Japanese government bond yield has soared to 2.8%, its highest since 1996, narrowing the yield gap with US Treasuries to just 1.7 percentage points from about four in October 2023. Yet the yen hit 162 per dollar in late June, its weakest since 1986, and hedge funds have piled on bearish bets at levels not seen since 2007, according to CFTC data. Bank of America reported meeting zero yen bulls during investor meetings last week, underscoring the pervasive pessimism.

Analysts attribute the yen's persistent decline to a breakdown in the usual correlation between rising yields and a stronger currency—a dynamic more typical of vulnerable emerging markets. With nominal wages rising over 3% for four straight months and the Tankan business survey showing the highest manufacturing confidence since 2018, the yen should be gaining. Instead, expectations of a further drop to 180 within the next year are growing. Investors worry that what happens in the bond market will determine whether bearishness spreads beyond Japan.