Anna 
Japan’s recent decision to raise interest rates for the first time since 2007 has been met with a surprising response as the yen weakened, prompting Japanese officials to issue their most robust warning in years of potential intervention to support the currency. Despite the historic shift in monetary policy, the yen traded at 151.97 per dollar on Wednesday, its weakest level since 1990. While a weaker yen may benefit Japanese exporters, it can impose financial strain on households by driving up import costs.
Several factors have contributed to the yen’s decline:
Sell the Fact: Anticipation of the Bank of Japan’s move to exit negative interest rates was widespread leading up to the decision. Economic indicators, such as rising wages, suggested a sustainable inflation outlook, reducing the need for accommodative policies. The well-anticipated event led to a more than 1% decline in the yen on the day of the announcement.
Carry Trades: The yen’s status as the lowest-yielding G10 currency makes it attractive for carry trades, where investors borrow in low-yielding currencies and invest in higher-yielding ones. Following the BOJ’s decision and the resolution of other central bank “event risks,” investors have been rebuilding their carry trade positions. The expectation of gradual rate hikes in Japan extends the appeal of yen carry trades.
Flow of Funds: The prevailing interest rate differentials prompt large Japanese investors to keep their funds invested abroad, where they can earn higher returns. This trend deprives the yen of support from repatriation flows, as evidenced by the substantial holdings of foreign bonds by Japanese investors.
Intervention Risk: The yen’s exchange rate against the dollar has breached levels that triggered intervention in 2022. While authorities have emphasized that they are not targeting specific exchange rate levels but rather speculative moves, markets remain cautious. Analysts suggest that intervention may be considered if the yen approaches the 152 level, but its effectiveness could be limited given the current dynamics of the foreign exchange market.
Despite Japan’s efforts to shore up the yen, uncertainties persist, posing challenges not only for the yen but also for other currencies affected by these developments.
