Japanese Yen: Policy support for BoJ hikes – BBH

Brown Brothers Harriman’s Elias Haddad explains that Japan’s government is signalling support for faster Bank of Japan (BoJ) rate hikes, which is helping to narrow the US-Japan interest rate differentials and potentially lower the USD/JPY exchange rate. Haddad clarifies that the assumption the BoJ must tighten sharply to strengthen the Japanese Yen (JPY) is incorrect, with fiscal risk and intervention risks being more significant factors for future alignment.

Although the BoJ is expected to raise rates more aggressively, this narrative is misleading. The 2-year US-Japan rate differential has already narrowed significantly in 2025 due to the BoJ's rate hikes, yet the USD/JPY has continued to increase. This discrepancy is mainly driven by a substantial rise in Japan's fiscal risk premium, as concerns over Japan's fiscal profligacy have eased.

The stabilization of these concerns, along with the possibility of further joint US-Japan FX intervention and a lessening energy outlook, should help bring USD/JPY back into line with the interest rate differentials.