Fed hike could push yen to 165 per dollar, ex-BOJ policymaker says

Read a summary of this article on FAST.
Get bite-sized news via a new
cards interface. Give it a try.
Click here to return to FAST Tap here to return to FAST
FAST

BENGALURU, June 23 - The Japanese yen could weaken to 165 per dollar if the Federal Reserve raises interest rates this year, former Bank of Japan policymaker Sayuri Shirai said on Tuesday, as wide U.S.-Japan rate differentials and doubts about Tokyo's appetite for intervention maintain pressure on the currency.

"The dollar/yen rate may gradually move toward 163-165," Shirai, now a professor at Keio University, told the Reuters Global Markets Forum. "It appears very challenging to change the trend right now ... since the Ministry of Finance and BOJ already allowed the rate to move (to) above 160 since early June." 

The yen hit a two-year low of 161.92 against the dollar on Monday and was last trading at 161.45. At 165, the yen would be at its weakest level since 1986. Meanwhile, the latest data showed speculative net yen short positions hit a July 2024 high at 150,132 contracts.

The yen's reaction to the Bank of Japan's latest quarter-point rate hike to 1 per cent, its highest level since 1995, and the record intervention has been limited. Japan's policy rate remains well below the Fed's 3.50 per cent to 3.75 per cent range, leaving rate differentials firmly against the currency.

CNA Games

Guess Word
Crack the word, one row at a time

Buzzword
Create words using the given letters

Mini Sudoku
Tiny puzzle, mighty brain teaser

Mini Crossword
Small grid, big challenge

Word Search
Spot as many words as you can
Show More
Show Less

The Fed's hawkish hold under new Chair Kevin Warsh has revived U.S. rate-hike bets, even as the U.S.-Iran deal pushed oil prices lower and eased global concerns about inflation.

Traders are largely pricing in around two quarter-point Fed hikes by the end of the year, with a 75 per cent chance of a hike by September. Some investment banks like BofA Global Research and Deutsche Bank abandoned prior forecasts for steady policy and now expect the Fed to raise rates within the year.

Shirai expects the BOJ to raise rates by a quarter point in October or December, noting that the recent pullback in oil prices has not really supported the yen.

"Markets expect another rate hike to 1.5 per cent next year," she said. "This is the maximum BOJ could do, I think."

Conversely, Jesper Koll, global ambassador for Monex Group Japan, predicted Japan's terminal rate will be around 3 per cent by early 2028.

"Based on a simple Taylor Rule, Japan's potential growth is 1 per cent, inflation target is 2 per cent; therefore, neutral policy rate should be around 3 per cent," he said. 

"The relentless weakness of the yen clearly demonstrates retail and professional investors think BOJ is behind the curve." 

To arrest the yen's slide, Tokyo has spent a record 11.7 trillion yen ($72.44 billion) intervening in the foreign exchange market between late April and early May.

Shirai said it is unclear whether the finance ministry could intervene again, noting that U.S. Treasury Secretary Scott Bessent had signaled the BOJ needed to raise rates to contain the yen's depreciation.

"Since the foreign exchange intervention accompanies U.S. Treasury securities selling, Bessent does not want to have any impact on U.S. Treasury yields," she said.

Fiscal concerns have also pressured Japanese assets. Japan is moving toward temporarily cutting a consumption tax on food to 1 per cent from 8 per cent without a clear signal on funding measures. Prime Minister Sanae Takaichi's spending plans have kept investors wary, while BOJ rate-hike bets, inflation risks and fiscal concerns have kept Japanese government bond yields elevated.

"We wonder how she (Takaichi) will do expansionary fiscal policy without issuing JGBs," Shirai said. "Markets expect the 10-year (Japanese government bond) yield will move up to 3 per cent or higher. This will really affect MOF interest payments."

The benchmark 10-year JGB yield was last at 2.660 per cent.

(Join GMF on LSEG Messenger for live interviews: )

Newsletter

Week in Review

Subscribe to our Chief Editor’s Week in Review

Our chief editor shares analysis and picks of the week's biggest news every Saturday.

Sign up for our newsletters

Get our pick of top stories and thought-provoking articles in your inbox

Subscribe here

Get the CNA app

Stay updated with notifications for breaking news and our best stories

Download here

Get WhatsApp alerts

Join our channel for the top reads for the day on your preferred chat app

Join here