A former senior Japanese finance ministry official has called on the Bank of Japan to raise its benchmark interest rate at every policy meeting, targeting a level above 2% to narrow the interest rate gap with the United States and alleviate pressure on the yen.
"Even if Japan has raised its policy rate to 1%, the real interest rate remains negative, while all other countries have positive real interest rates," said Takehiko Nakao, former vice finance minister for international affairs, during a Monday program on TV Tokyo. Nakao added that given inflation hovers around 2%, it would not be surprising to see Japan's policy rate reach 2.25% or even 2.5%.
"Japan can intervene to prevent further yen depreciation, but it also needs to raise rates through monetary policy," Nakao said, noting that interest rate differentials remain the primary driver of the yen's "extreme weakness."
Nakao also referenced remarks by U.S. Treasury Secretary Scott Bessent, who has repeatedly emphasized the role of appropriate monetary policy in addressing yen weakness. Nakao said these comments indicate the U.S. Treasury chief favors rate hikes over relying on currency intervention. However, if Japan chooses to intervene further, it still has ample reserves. "We still have $1.2 trillion in foreign exchange reserves, so options remain abundant," Nakao said.
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