The yen fell sharply after Bank of Japan Deputy Governor Shinichi Uchida said authorities would not raise benchmark interest rates further if financial markets are unstable.
The Japanese currency weakened as much as 2.5 percent to 147.90 per dollar after Wednesday’s comments, before paring its loss to trade around 147.30.
Uchida’s comments were the first by a Bank of Japan board member since the bank raised rates on July 31, a move that triggered a sharp rally in the yen that reverberated through global markets.
The moves were compounded by views that the Federal Reserve will cut interest rates more aggressively than previously thought, prompting traders to quickly dump once-popular yen-funded carry trades, including crowded positions in U.S. technology stocks.
Uchida said recent market movements are “extremely volatile” and the central bank needs to maintain a loose monetary policy for the time being.
He also said the Bank of Japan will not raise rates when the market is unstable, countering the central bank’s hawkish stance last week. In later comments, he noted that communications with the market must be done carefully.
“Current yen positioning remains short, indicating potential for further movement depending on future Fed actions and economic conditions,” Charu Chanana, head of FX strategy at Saxo Markets, wrote in a note.
“The risk-reward balance is still tilted towards further yen strengthening, and the timing depends on the Fed’s approach to rate cuts,” the analyst added.
For UBS, Wednesday’s losses are just a blip and the bank’s strategists recommend buying yen as they forecast the currency will strengthen more than 10 percent by the end of 2025.
Uchida is widely known for playing a leading role in charting central bank Governor Kazuo Ueda’s journey toward policy normalization. The Bank of Japan ended ultra-easy policy in March with its first rate hike in 17 years.
Swap markets now show a 30 percent chance of a 25 basis point hike ahead of the Bank of Japan’s December policy meeting, down from more than 60 percent the day after last week’s move.
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