BOJ Hikes to 1.25%: Dollar-Yen Carry Trade Narrowing Rate Gap

The Bank of Japan raised its policy rate 25 basis points to 1.25% on September 18, the highest level since 1995 and the second hike since the central bank exited negative rates this cycle. The board split 7-2, with members Toichiro Asada and Ayano Sato dissenting in favor of a hold. Within a week, the yen had fallen more than 2% against the dollar anyway.

That gap between the headline and the market reaction is the story. Japan's Ministry of Finance had confirmed, just three weeks earlier, that it spent a record 15.3993 trillion yen (about $96.5 billion) defending the currency between July 30 and August 26, the largest single intervention round on record and part of a joint action with the US…