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.
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