Japan Interest Rate Hike: Yen Extends Losses, Japan 10-Year Yield Hits Highest Since 2006

The yen extended losses against the dollar after the Bank of Japan raised its benchmark interest rate by 25 basis points. The 10-year Japanese government bond yield rose to 2.0%, the highest since 2006.

Japan’s currency weakened to as much as 0.4% to 156.16 against the dollar, amid uncertainty about how much further the BOJ may hike rates next year. The Nikkei 225 Stock Average largely held its earlier gain.

Friday’s decision was unanimously expected by all 50 economists surveyed by Bloomberg.

The decision follows mounting bets on BOJ tightening after Governor Kazuo Ueda offered clear hints of a move. Prime Minister Sanae Takaichi’s administration is seen as willing to tolerate a rate increase, with Chief Cabinet Secretary Minoru Kihara saying earlier this week that the specifics of monetary policy should be left to the central bank.

The yen has strengthened more than 1% from its late-November trough, when it briefly hit a 10-month low against the dollar, as bets on a December hike gained momentum. The benchmark 10-year yield touched 1.97% earlier this month, the highest in 18 years, prompting warnings from several officials including Ueda. The yield was still around that level on Friday.

Investors now turn to Ueda’s press conference later today for guidance on the future rate path, with inflation still elevated and rate differentials with major economies remaining wide.

Bloomberg News reported last week that BOJ officials see it as likely that rates will eventually rise above 0.75% before the tightening cycle ends, and a former executive director suggested the BOJ could raise rates as many as four times by 2027.