The yen is again approaching the 160 level against the US dollar, prompting a stark warning from Japan's former top currency diplomat. Mitsuhiro Furusawa has stated that Japan could intervene in the currency market "anytime," potentially in coordination with the United States, and has also hinted at the possibility of faster-than-expected interest rate hikes by the Bank of Japan (BOJ) to stem the yen's decline.
Furusawa described the yen's current level as "clearly too weak," noting that it is inflating import costs and damaging the broader economy. He added that if the yen falls back to levels seen before last month's joint intervention by Tokyo and Washington, both governments might step in again. "It may not be a matter of intervening when the dollar-yen rate reaches 160 or 162. But intervention could happen anytime, including coordinated action with the United States," he said in an interview on Thursday.
Furusawa, who maintains close ties with current policymakers in Japan and overseas, noted that the previous joint intervention with the US pushed the yen from a 40-year low of 163.99 against the dollar to around 155.20. Since then, the yen has weakened again to trade near 159.40. He argued that intervention alone only buys time, and more fundamental measures, such as accelerated rate hikes by the BOJ, are needed to reverse the yen's downtrend.
"Most market participants expect the BOJ to raise rates in September, and I believe it should," Furusawa stated. However, he emphasised that it is more important for the central bank to communicate the possibility of a faster pace of rate increases. Since ending its massive decade-long stimulus programme in 2024, the BOJ has raised rates roughly twice a year, including a hike to 1% in June, the highest in 31 years.
Based on the BOJ's estimate that neutral interest rates—which neither stimulate nor cool the economy—are between 1.1% and 2.5%, Furusawa speculated that the central bank aims to lift rates to around 1.5% to 1.75%. "After September, the next move could come in December or January next year. Then, if growth momentum doesn't slow, another hike could happen sometime in the next fiscal year, which begins in April 2027," he explained.
Hints from US Treasury Secretary Scott Bessent and a series of hawkish comments from the BOJ have already locked in a rate hike for September. Data shows that markets now price in a 76% probability of a September rate increase, up from just 24% on July 30. Furusawa stressed that it is crucial for Prime Minister Shigeru Ishiba's government not to obstruct the BOJ's rate hikes and to uphold its commitments to fiscal sustainability.
"The ideal outcome is to exit the phase of excessive yen selling through monetary and fiscal policy, while allowing the growth strategy to take effect and strengthen Japan's economy. This would lead to a gradual appreciation of the yen over time," Furusawa said. After leaving Japan's Finance Ministry, Furusawa served as Vice President of the International Monetary Fund until 2021. He is currently the Director of the Global Financial Affairs Institute at Sumitomo Mitsui Banking Corporation.
Comments