Japan may see more yen intervention, faster BOJ rate hikes, ex-top FX diplomat says

Former top Japanese currency diplomat Mitsuhiro Furusawa suggests Japan may undertake joint yen intervention at any moment and signal potential faster-than-anticipated interest rate hikes to counter the currency's decline. The yen is evidently too weak at present levels, fueling higher import costs, Furusawa contends. He adds that Tokyo and Washington may intervene again if the yen returns to levels observed before their cooperation last month.

While intervention does not offer a permanent solution, it offers a brief reprieve, Furusawa emphasizes. More profound measures, like swifter rate hikes by the Bank of Japan (BOJ), are crucial to reverse the yen's downward trajectory, according to Furusawa. The BOJ has raised rates roughly twice yearly since exiting a massive, decade-long stimulus in 2024.

Furusawa predicts the BOJ would aim to raise rates to 1.5 per cent to 1.75 per cent, based on its estimate of Japan's neutral rate. Following September, the next hike may occur in December or January, followed by another in the next fiscal year (starting April 2027) if the economy maintains momentum. US Treasury Secretary Scott Bessent's intervention and BOJ's hawkish communications have led to a high probability of a rate hike in September, with markets now seeing a 76 per cent chance.

Furusawa stresses the importance of Prime Minister Sanae Takaichi's administration not obstructing the BOJ's rate hikes and delivering on its fiscal sustainability pledge.