By Mia Glass and Winnie Hsu

Japanese Yen: photo by Maccabee(Pixabay)

(Bloomberg) -- The yen sped past more milestones Thursday after the Bank of Japan kept interest rates steady, sliding more than 1% to the weakest level against the dollar since July.

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The currency depreciated as much as 1.3% to 156.77 against the greenback after Governor Kazuo Ueda said in his post-decision press conference that he needs to watch momentum toward the next spring wage negotiations to decide on policy. That comment that cast doubt on whether the BOJ may hike in January.

Japanese government bond futures rose after fluctuating earlier in the day and were up 28 ticks at 142.42 as of 4:41 p.m. in Tokyo. The decline in the yen followed a 0.9% drop on Wednesday after the Federal Reserve cut interest rates while signaling caution over future rate reductions.

Overnight index swaps indicate a 49% chance of a rate hike by the BOJ’s next policy decision in January.

The breach of 156 is significant, taking the yen into a zone that’s closely watched by currency strategists. They see a slide like this having the potential to trigger for verbal intervention from Japanese authorities, and adding pressure on the BOJ to hike rates sooner rather than later.

“The market’s expectation seems to be that a rate hike at the January meeting is unlikely, as it would not coincide with the spring wage negotiations,” said Shoki Omori, chief Japan desk strategist at Mizuho Securities in Tokyo. “While the Bank of Japan may have maintained its flexibility, the market may have become skeptical.”

The decision was largely priced in by overnight index swaps prior to the meeting and predicted by the majority of economists in a Bloomberg survey. Rate hike bets had receded in recent weeks, contributing to a six-day losing streak in the yen through Monday, its longest stretch of declines versus the dollar since June.

BOJ officials saw little cost in waiting before raising interest rates, Bloomberg reported earlier this month, citing people familiar with the matter.

“It was not completely a surprise that Ueda has maintained maximum flexibility for January,” said Charu Chanana, chief investment strategist at Saxo Markets. “But what came as a surprise was that he even sounded unconvinced about the ongoing wage-price spiral. This seems to be a pushback on January rate hike expectations.”

What Bloomberg’s Markets Live Says...

“The yen’s fate is out of the hands of the Bank of Japan, for now. The currency faces more of 2024’s weakness and whiplash — a multi-decade low of 160/USD and a one-year high — until policymakers deliver a bolder signal that policy normalization will resume.”

Mary Nicola, Markets Live strategist at Bloomberg.

Click here to read the full report.

Of note to traders, the BOJ said that the currency is more likely to affect prices than before. And board member Naoki Tamura voted against the stand-pat decision, proposing a rate hike to 0.5% at this gathering.

Currency strategists have pointed to the risk of further vulnerability for the yen ahead if the BOJ decides to keep interest rates unchanged until March or later.

--With assistance from Marcus Wong and Momoka Yokoyama.

(Updates with further decline in the yen.)

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