The yen rose 0.7% to 156.00 per dollar, retracing much of the losses accumulated since Friday, following a well-telegraphed Bank of Japan (BOJ) rate hike. It also gained 0.5% against the euro, the Australian dollar, and the British pound, though it remained near recent lows.
Japanese Finance Minister Satsuki Katayama emphasized that Tokyo has a “free hand” to respond to excessive moves in the yen, signaling the government’s readiness to intervene if necessary. Analysts say the warning has temporarily restrained yen weakness, though near-term volatility is expected to persist.
Matt Simpson, senior market analyst at StoneX, noted that any intervention would likely occur during the low-liquidity period between Christmas and New Year to maximize its impact. “I’m just not convinced they need to, unless we see a volatile breakout above 159,” he said, referencing the level at which intervention might be triggered. Japan has previously intervened in currency markets in 2022 and 2024 to support the yen.
Meanwhile, Japanese government bonds pared gains following reports that Tokyo’s new debt issuance for fiscal 2026 is likely to slightly exceed the current year’s 28.6 trillion yen ($182 billion). The government is expected to finalize the fiscal 2026 draft budget on Friday.
The yen’s recovery comes despite recent dollar weakness. After the Federal Reserve cut interest rates earlier this month and projected further reductions in 2026, traders have priced in two more rate cuts next year. Charu Chanana, chief investment strategist at Saxo, said the combination of a slow BOJ hiking cycle and potential Fed easing could encourage range-bound trading for the yen, with strength likely if U.S. yields fall or risk sentiment shifts.
“Biggest risk will be if the U.S. stays ‘higher-for-longer’ and BOJ turns cautious again,” Chanana added, citing upcoming catalysts such as the Shunto wage negotiations and U.S. interest rate moves.
Dollar Drifts Lower
The U.S. dollar remained under pressure on Tuesday, with the euro rising 0.1% to $1.1776 and sterling climbing 0.2% to $1.3489, a two-and-a-half-month high. The dollar index, which tracks the currency against six rivals, fell 0.2% to 98.061, extending losses for a second day and marking a 9.6% decline for the year—its steepest annual drop since 2017.
MUFG strategists said the dollar’s decline may mark the start of a multi-year downtrend.
Investor attention is now on delayed U.S. GDP data, postponed due to the 43-day government shutdown. Economists expect a 3.3% annualized growth rate in the third quarter, slightly lower than the second quarter’s 3.8%, potentially confirming the “K-shaped” nature of the economy, where higher-income households are faring better than middle- and lower-income groups.
Other currencies also strengthened on Tuesday. The Australian dollar gained 0.2% to $0.6669, the New Zealand dollar rose 0.3% to $0.5814, and the Swiss franc reached a six-week high of 0.7895 per U.S. dollar, up 0.4%.