The yen weakened further against leading world currencies on Thursday amid market speculation that the Bank of Japan won’t raise interest rates fast enough to curb carry trades, the main reason behind the yen’s weakness in recent months.

The BoJ board on Wednesday voted 8 to 1 to raise interest rates from 0.25 per cent to 0.5 per cent, their highest level in more than a decade, but said future rate rises would be “very gradual” and it would keep monetary policy “extremely accommodative”.

The rates move failed to cause any let-up in the global carry trade, which has seen investors borrowing the Japanese currency to invest in higher-yielding assets elsewhere, sending the yen to record lows on Wednesday.

The currency fell further on Thursday morning, trading at Y158.97 against the euro at 10:50am Tokyo time from Y158.90 on Wednesday. It weakened to Y121.01 against the dollar from Y120.93.

Neil Mellor, currency strategist at Bank of New York, said Wednesday the yen’s weakness was no surprise given that Japanese interest rates were set to remain low for the foreseeable future.

The interest rates increase, the first since last July, signalled the central bank’s belief in the underlying strength of Japan’s economy. But in an unprecedented split of the BoJ board’s senior members, Kazumasa Iwata, one of two deputy governors, voted against the rise. Mr Iwata has argued that weak consumption and wages and a headline inflation rate of just 0.1 per cent did not justify a rate increase.

The bank said in a statement it judged that the economy would continue its “moderate expansion” and risks associated with a slowing US economy had abated.

The decision to raise rates came after strong growth in the fourth quarter, when gross domestic product grew 4.8 per cent on an annualised basis. That was the only significant positive piece of data released since last month when the board voted six to three against a rate increase.

The bank was also influenced by a strong stock market performance and continued yen weakness, according to people close to the board. Reflecting concerns that continued easy monetary policy could encourage speculation, including in the carry trade, the bank said: “If expectation takes hold . . . that interest rates will remain low for a long time regardless of economic activity and prices, there is a possibility that sustained economic growth will be hampered by misallocation of funds.”

Toshihiko Fukui, governor, is understood to have taken on board views expressed at this month’s G7 meeting in Essen that the yen, which had been trading at 21-year lows in adjusted terms, was out of sync with Japan’s relatively robust economic performance.

Masaaki Kanno, chief economist at JPMorgan in Tokyo and a former BoJ staffer, said: “This is an indirect warning from the BoJ: ‘Do not expect a weak yen forever’.”

The bank said it expected “very low interest rates for some time”. Japan's rates are 475bp lower than those in the US and 300bp lower than European rates.

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