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HomeMarketYen Surges After Surprise Bank of Japan Interest Rate Tweak

Yen Surges After Surprise Bank of Japan Interest Rate Tweak

The yen has been weakening for most of the year as the central bank kept interest rates low while others were hiking.

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The yen surged against the dollar Tuesday morning after the
Bank of Japan
changed a key plank of its interest-rate policy. 

For years, Japan has lagged far behind other major central banks in keeping interest rates ultra low. Policy makers in the U.S. and Europe have tightened at the fastest pace in a generation to try to rein in inflation after a surge in energy prices caused prices to rise at a pace not seen in four decades.

But on Tuesday, the Bank of Japan made its surprise move and the yen rose. One dollar bought 132 yen, compared with more than 137 yen before the Tuesday announcement. That’s a change of more than 3%. The Japanese yen had been weakening for much of this year as the Federal Reserve rapidly increased interest rates while Japan insisted on keeping them at rock bottom to bolster the economy.

Short-term interest rates have been close to zero in Japan for years, yet the stimulative policy has failed to generate inflation as intended. That led the central bank in 2016 to start doing yield-curve control. This involves buying longer-dated bonds to keep interest rates low at two years, ten years, and other maturities.

On Tuesday, the Bank of Japan said it would change the cap for the interest rate on the 10-year government bond from 0.25% to 0.5%. That rate quickly climbed to 0.4%.

Raising interest rates usually causes currencies to strengthen because it makes the relative returns in that currency more attractive. It also tends to push down stocks because it becomes more expensive for companies to borrow money. The Nikkei slipped more than 2%.

In September, Japan intervened in foreign exchange markets to try to stop the yen from weakening so much against its peers.

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