The Bank of Japan raised its benchmark interest rate to 0.1 percent, ending eight years of negative rates and marking its first hike in 17 years. The widely anticipated move failed to bolster the yen, which dropped 0.8 percent against the U.S. dollar to 152.40 shortly after the announcement, unwinding earlier gains.
Futures had priced an 85 percent probability of a 0.1 percent hike. The yen's weakness stemmed from the BOJ's cautious forward guidance. The central bank signaled a gradual approach to any further tightening, tempering expectations for aggressive rate increases and capping potential curve steepening.
Japanese Government Bond yields showed a muted reaction. The 10-year JGB yield rose one basis point to 0.76 percent, reflecting the market's assessment that the BOJ will maintain an accommodative stance despite exiting negative rates. The U.S. dollar index climbed to 105.3, its highest since November.
The yen's continued weakness reinforces the attractiveness of carry trades for global investors, who borrow in the low-yielding yen to fund investments in higher-yielding global assets. Institutional investors are reassessing duration risk in their global fixed-income portfolios given the persistent yield differential between Japan and other major economies.
