The Japanese yen weakened against a basket of major and minor currencies during Asian trading on Friday, pulling back from its highest level in 11 weeks against the US dollar as traders engaged in profit-taking following the previous session's sharp rally.

The yen outperformed all major currencies on Thursday, posting its largest daily gain since April amid speculation that Japanese authorities had intervened in the foreign exchange market to support the currency after its prolonged weakness.

In line with market expectations, the Bank of Japan left interest rates unchanged while reaffirming its commitment to gradually normalize monetary policy in response to rising inflation risks.

The Price

The US dollar rose 0.9% against the Japanese yen to 160.88, up from the session opening level of 159.50, after touching an intraday low of 159.37.

The yen ended Thursday's session up 2.4% against the dollar, marking its second consecutive daily gain and reaching an 11-week high of 157.96 amid speculation that Japanese monetary authorities had intervened in the foreign exchange market.

Thursday's rally represented the yen's strongest daily advance since April 30, when the Bank of Japan intervened to support the currency against excessive weakness.

Japanese monetary authorities

According to market sources, Japanese authorities intervened in the foreign exchange market during Thursday's New York session by buying yen and selling dollars, marking the first such operation in three months.

The reported intervention reflects growing concern among policymakers in Tokyo over the yen's continued weakness after it fell to its lowest level in nearly 40 years, increasing import costs and adding to inflationary pressures, particularly as higher energy prices continue to be fueled by the conflict involving Iran.

Japan's top currency diplomat, Atsushi Mimura, declined on Friday to confirm or deny whether authorities had intervened in the foreign exchange market. However, he indicated that Japan has been coordinating closely with the United States to support the yen and limit its sharp decline.

Asked whether the coordination included joint intervention with the United States, Mimura said Japan was receiving support from Washington that went beyond moral backing and that he remained in close contact with US officials.

When questioned about whether that cooperation also included the so-called "exchange rate reviews" that often precede currency intervention, he replied that the support "includes that as well."

US Treasury Secretary Scott Bessent said on Thursday that Japan may have intervened to support the yen, adding that the currency appeared to be "significantly undervalued."

Japan's Nikkei newspaper also reported on Friday that Tokyo had likely carried out a large-scale yen-buying intervention. The report added that US authorities had conducted exchange rate consultations, while the Federal Reserve Bank of New York declined to comment.

Monthly performance

With July trading set to conclude following Friday's settlement, the Japanese yen is up more than 1% against the US dollar for the month, putting it on track to record its first monthly gain in three months.

Bank of Japan

As widely expected, the Bank of Japan left its benchmark interest rate unchanged at 1.0% on Friday, the highest level since 1995.

The decision was approved by an 8-1 vote, with board member Hajime Takata calling for a 25-basis-point increase to 1.25%, highlighting the presence of a more hawkish faction within the central bank.

In its monetary policy statement, the Bank of Japan said it would continue raising interest rates and adjusting the degree of monetary accommodation in response to developments in economic activity, prices, and financial conditions.

The central bank said inflation remains close to its 2% target but warned that upside risks to prices persist, particularly because of higher energy costs and the weakness of the yen.

The Bank of Japan also reiterated that it will continue raising interest rates if economic activity and inflation evolve in line with its projections.

Japanese interest rates

Following the policy meeting, market pricing for a quarter-point interest rate increase at the Bank of Japan's September meeting climbed above 85%.

Investors are now awaiting remarks from Bank of Japan Governor Kazuo Ueda later on Friday for further clues on whether the central bank is prepared to proceed with another interest rate increase in September.

Economic Outlook

We expect that if Governor Ueda delivers a more hawkish message than markets currently anticipate, expectations for a September rate hike will strengthen further, providing additional support for the Japanese yen against a basket of global currencies.