Asset Management One (AM-One), the asset management arm of Mizuho Financial (MFG.US), suggests that a Bank of Japan interest rate hike in April could drive the yen to strengthen beyond the 150 yen per dollar level, according to Chief Investment Officer Shigeki Muramatsu. The firm, which oversees approximately $512 billion in assets as of the end of last September, also favors purchasing ultra-long-term Japanese government bonds—the very instruments that fueled last month's market turbulence—citing their relatively high yields in light of Japan's growth prospects. Shigeki Muramatsu highlighted market apprehensions regarding the BOJ's slow pace of monetary policy tightening. In a recent interview, he stated, "Market speculation that the BOJ may struggle to raise interest rates under the current administration has contributed to the yen's weakness. However, I believe the reality is different."
Late last month, the New York Federal Reserve contacted financial institutions to inquire about the yen's exchange rate. Wall Street interpreted this as a potential sign of rare coordinated intervention by U.S. and Japanese authorities to support the Japanese currency. Subsequently, the persistently weak yen abruptly reversed its trend; the USD/JPY rate swiftly retreated from a peak near 160 and fell to 152.10 last week, marking its lowest level in three months. Yen weakness is expected to remain a key factor prompting the BOJ and the government to endorse the necessity for rate hikes. Given the risk that a depreciating yen could fuel inflation, Prime Minister Takaichi Sanae is widely believed to have abandoned efforts to dissuade central bank officials from hiking rates as early as last December. Widespread household dissatisfaction over soaring living costs had led to significant setbacks for her Liberal Democratic Party in two elections prior to her taking office in October.
U.S. Treasury Secretary Bassett has also urged Japanese authorities to permit the BOJ to implement further rate increases to combat inflation. Money markets currently price in about a 69% chance of a BOJ rate hike by April, a substantial increase from the roughly 40% probability seen at the end of last year. Shigeki Muramatsu noted that the apparent coordination between the U.S. and Japan raises the likelihood of an earlier BOJ rate hike. He remarked, "When Secretary Bassett is making such considerable efforts, it's difficult to imagine Japan not offering him a 'parting gift'." However, Muramatsu also cautioned that a breach of the 150 yen level for USD/JPY could exert pressure on Japanese stock markets. He added that, over the long term, Asset Management One maintains an optimistic outlook on Japanese equities, as households in Japan may increasingly allocate funds to risk assets.
Following the BOJ's January policy meeting, institutions including BNP Paribas and SMBC Nikko Securities have brought forward their expectations for the next policy adjustment to April. Even those analysts who still project the next move in June or July are increasingly flagging the rising risk of an earlier policy shift, particularly if yen weakness persists. Furthermore, the minutes from the BOJ's January policy meeting revealed a growing awareness among policymakers of the need for timely interest rate hikes, as authorities closely monitor the inflationary impact of the weak yen. Shigeki Muramatsu also expressed that 30-year Japanese government bonds appear attractive. Concerns over Japan's fiscal sustainability, sparked by Prime Minister Takaichi's pre-election proposal for tax cuts without a clear funding source, had prompted investors to sell off these bonds. However, after surging last month, the yield on these bonds has stabilized around 1.64%. Muramatsu believes that unless the scale of tax cuts exceeds the government's current pledge to abolish the food tax within two years, bond yields should remain stable. He pointed out that despite Japan's declining economic growth trend, its bond yields remain higher than comparable German bonds. He added that senior Japanese government officials engaged in substantial communication following the bond market sell-off, and Prime Minister Takaichi appears to have moderated her tone.
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