The yen fell for a fourth day as the Bank of Japan (BoJ) said interest rate increases would be gradual, after policymakers raised borrowing costs for the second time in eight months.
Japan's currency declined after bank Governor Toshihiko Fukui and his policy board colleagues voted 8 to 1 to increase the overnight lending rate a quarter percentage point to 0.5 percent. Deputy Governor Kazumasa Iwata voted against the increase.
Japan's benchmark rate remains the lowest among major economies. It is still 4.75 percentage points lower than the US Federal Reserve's 5.25 percent and 3 percentage points lower than the European Central Bank's 3.50 percent. The lowest benchmark rate among major economies has encouraged investors to borrow in yen to invest in higher-yielding assets, known as the carry trade.
"There could be no rate hike in the coming six months," said Toru Umemoto, chief currency analyst at Barclays Capital in Tokyo.
"This will provide a safe environment for carry trades," Umemoto said.
The yen dropped to 120.34 against the US dollar at 7:08am in London, from 120.02 in New York on Tuesday. It slid to 158.17 per euro from 157.68.
The yen may fall to 125 per US dollar by the end of next month, he said.
On the Tokyo stock market, the benchmark Nikkei-225 index of leading shares rebounded temporarily, as relief set in that the next rate hike won't come for a while, but then finished down 25.91 points or 0.14 percent to 17,913.21. The US dollar, which had slipped on Japanese media reports of an imminent rate raise, also rebounded after the move.
But the broader TOPIX index, which includes all shares on the exchange's first section, rose 4.50 points, or 0.25 percent to 1,787.23 -- the index' highest close since April 7 last year.
The central bank will adjust policy "gradually in the light of economic activity and prices, while maintaining the accommodative financial conditions ensuing from very low interest rates for some time," it said in a statement.
Consumer prices excluding food will stay around zero percent, it said.
The bank said a decline in oil costs may cause core consumer prices, which include energy, to drop temporarily. Prices will rise in the medium to long term, it said. Core consumer prices rose 0.1 percent in December, slowing from 0.2 percent in November, as oil prices fell.
"The yen's bearish trend will continue" as long as rate increases are gradual, said Satoru Ogasawara, currency analyst and economist at Credit Suisse Group in Tokyo.
It may fall to 125 per US dollar over the next three months, he said.
Losses in the yen may accelerate should it break 120.50 per US dollar, where traders have orders to sell, said Michiyoshi Kato, a senior currency dealer in Tokyo at Mizuho Corporate Bank Ltd, a unit of Japan's second-largest lender by assets.
Traders sometimes place instructions to limit losses in case bets go the wrong way.
After the bank's decision, investors saw zero chance of another increase at the next meeting on March 19 to March 20, according to calculations by Credit Suisse Group based on the exchange of interest payments.
Japan's currency traded at 235.16 against the pound from 234.68 yesterday.
It stood at 94.79 versus the Australian dollar from 94.38. Against the New Zealand dollar, it was at 84.48 from 84.20.
Prime Minister Shinzo Abe, who faced elections for parliament's upper house in July, on Monday said that the BoJ should "take into consideration all factors, including risks."
"One rate hike won't stem the currency's decline," said Tetsuhisa Hayashi, chief currency trader in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd, a unit of Japan's largest lender by assets.
"The next rate hike will probably be after August, as we have the Upper House elections in July," Hayashi said.
A top government spokesman responded to the BoJ's decision to raise interest rates, calling the move "appropriate."
"As I understand it, discussions were held at the BoJ, and they reached an appropriate decision," said Chief Cabinet Secretary Yasuhisa Shiozaki, a former official at the BoJ.
Shiozaki said that the one dissenting vote by Iwata against the quarter-point rate rise to 0.5 percent was a reflection of healthy debate by the central bank's monetary policy board.
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