The yen slumped to a 13-month low against the dollar in Asian trade Wednesday following reports that the Bank of Japan will refrain from raising interest rates this week, dealers said. The dollar rose to 120.74 yen in Tokyo afternoon trade, off a high of 120.90 but still up from 120.65 in New York late Tuesday.

The euro rose slightly to 1.2926 dollars from 1.2920 while firming to 156.02 yen from 155.90. Markets had been anticipating a quarter point interest rate rise to 0.5 per cent by the BoJ at the end of a two-day meeting through Thursday, following a slew of weekend reports about a likely rate hike. But the Kyodo News agency and other local media late Tuesday quoted unnamed BoJ officials as saying that the central bank was now unlikely to tighten monetary policy this week.

‘It is hard to buy the yen before the BoJ decision Thursday, looking at the news reports,’ said Marito Ueda, currency trader at FX Prime. ‘And yet, even if interest rates do rise in Japan, any support for the yen may be only temporary as there is no clear prospect of a further rate hike,’ he said.

Even after a rate hike, at 0.5 per cent the BoJ’s benchmark lending rate would still be well below the US Fed funds rate of 5.25 per cent and eurozone interest rates of 4.50 per cent. Analysts say a decision by the BoJ to delay a rate hike could also raise questions about its independence as it may be seen to be caving in to pressure from the government to give the economy more time to recover.

The market is also looking ahead to a batch of US economic indicators including the Federal Reserve’s ‘Beige Book’ economic survey as well as industrial output and producer price data for December, all due on Wednesday. ‘Recent developments in the US economy show that the possibility of the Fed cutting rates is declining, which puts further pressure on the yen,’ said Ueda.

‘If the BoJ does not raise rates, I would say the yen could decline to around 121.40 yen to the dollar,’ he said. The dollar rose to 32.79 Taiwan dollars from 32.61 on Tuesday afternoon, to 936.80 South Korean won from 934.35 and to 35.87 Thai baht from 35.80. The US currency also gained ground to 9,082.50 Indonesian rupiah from 9,014.00 and to 1.5388 Singapore dollars from 1.5372 while falling to 48.77 Philippine pesos from 48.86.