Is the problem with the yen a real one?

Today’s decision by the Bank of Japan (BoJ) to raise it key policy rate by another 25bp has done nothing to shore up the yen, which has fallen by another ~1% against the US dollar. Admittedly, the central bank’s decision was widely anticipated. But the persistent weakness of Japan’s currency is puzzling to us, even allowing for a pick-up in inflation and an increase in its expected level: after all, real interest rates have still been shifting in Japan’s favour vis-à-vis the US. Our forecast is that USD/JPY will end next year at 145, which is considerably stronger than its level now of ~157.