Key facts
- Japanese authorities intervened to support the yen on Thursday.
- The yen briefly rose on Friday as traders watched for intervention.
- The Bank of Japan maintained its short-term interest rate at 1%.
- The BOJ warned that underlying inflation risks are skewed to the upside.
- The yen reversed its gains and weakened against the dollar.
- South Korea also intervened in currency markets to support the won.
The Japanese yen experienced sharp fluctuations on Friday as traders remained on alert for potential currency intervention, following authorities' actions the previous day. The yen briefly surged as much as 0.6% to 158.535 per dollar in London trading, but this upward movement was short-lived, and it later weakened to 159.905.
The Bank of Japan (BOJ) maintained its short-term interest rates at 1% in a widely anticipated decision. However, the central bank issued a warning that underlying inflation could exceed its target, suggesting a possibility of further rate hikes, potentially as early as September. BOJ Governor Kazuo Ueda noted that many board members' inflation forecasts are high, with risks skewed to the upside.
Analysts suggest that the BOJ's slow pace of rate hikes has contributed to the yen's recent slide to 40-year lows. Speculators have amassed significant bearish positions on the yen, with net short positions near a two-year high. Some strategists warn that repeated intervention without fundamental policy shifts could accelerate yen depreciation.
In a rare coordinated move, South Korea also intervened in currency markets on Thursday, selling dollars to support the won, which briefly rose before paring gains. The U.S. authorities also reportedly conducted rate checks, offering support to Japan's currency efforts.
The dollar weakened globally following the U.S. Federal Reserve's decision to leave interest rates unchanged, leading traders to question the Fed's commitment to controlling inflation. This contributed to the dollar heading for its largest weekly fall since early April. Major currencies like the euro and sterling also saw modest declines against the dollar.