The Bank of Japan had already announced an interest rate hike, in order to close the gap somewhat with the U.S. rate. However, by the time Japan’s monetary authority confirmed the increase on Friday, September 18, the Federal Reserve had already preempted it with another hike that further widened the gap between the two economies.

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The risk of a devalued yen

A devalued yen presents a major concern for the United States: when the currency is too weak, Japan is forced to sell off U.S. Treasuries, in order to access physical American dollars (which, in turn, are used to prop up the yen). Hence, with too big of a difference between the two currencies, the fear of massive sell-off becomes imminent. Additionally, with Tokyo having promised to invest $550 billion in the U.S. through 2029 (in exchange for lower tariffs on Japanese goods), a weak yen makes such a commitment more shaky. By raising interest rates, the Bank of Japan makes returns on Japanese assets more appealing to local and foreign investors, thus making the yen stronger and U.S. dollar investment more feasible.