A former senior Japanese foreign exchange diplomat stated that Japan may intensify its intervention in the yen market, while the Bank of Japan accelerates the pace of interest rate hikes.
Mitsuhiro Furusawa, Japan’s former top foreign exchange diplomat, stated that Japan could engage in joint intervention to support the yen “at any time,” and hinted at the possibility of raising interest rates faster than expected to curb the currency’s decline. Furusawa noted that the yen’s current level is “clearly too weak,” driving up import costs and harming the economy. He added that if the yen returns to the levels seen prior to the joint intervention by Tokyo and Washington last month, the two countries may intervene again.
"It may not be a matter of intervening only when the USD/JPY exchange rate hits 160 or 162. However, further intervention, including coordinated action with the United States, could occur at any time," he said in an interview on Thursday. Furusawa maintains close ties with current policymakers in Japan and abroad.
Previously, coordinated intervention between Japan and the United States pushed the USD/JPY exchange rate up from its 40-year low of 163.99 to around 155.20. Since then, the yen has retreated to approximately 159.40 against the dollar. Furusawa stated that intervention can only buy time, and more fundamental measures, such as the Bank of Japan accelerating interest rate hikes, are needed to reverse the yen’s downward trend.
Furusawa said, "Most market participants expect the Bank of Japan to raise interest rates in September, and I believe it should do so." However, it is more important for the central bank to signal the possibility of accelerating the pace of rate hikes.
Since ending its decade-long massive stimulus program in 2024, the Bank of Japan has raised interest rates at a pace of approximately twice a year, including lifting the rate to 1% in June, its highest level in 31 years.
"Based on the Bank of Japan’s estimate that the neutral interest rate—the level that neither suppresses nor stimulates economic growth—lies between 1.1% and 2.5%, my guess is that the BOJ aims to raise rates to around 1.5% to 1.75%," Furusawa said.
"After September, the next move could come in December or January of next year. Then, if economic growth momentum does not weaken, there may be another rate hike sometime in the next fiscal year, which begins in April 2027," he said.
Hints from U.S. Treasury Secretary Scott Bessent, combined with a series of hawkish comments from the Bank of Japan, have solidified expectations of a rate hike in September. Data shows that the market currently assigns a 76% probability to a September rate hike, up from just 24% on July 30.
Furusawa emphasized that Prime Minister Sanae Takaichi’s government must not hinder the Bank of Japan’s rate hikes and should fulfill its commitments regarding fiscal sustainability. "The ideal outcome is to escape the situation of excessive yen selling through monetary and fiscal policies, while allowing growth strategies to take effect and strengthen Japan’s economic fundamentals. This will lead to a gradual appreciation of the yen over time," Furusawa said.
After leaving Japan’s Ministry of Finance, Furusawa served as Deputy Managing Director of the International Monetary Fund until 2021. Currently, he is the Director of the Institute for Global Financial Affairs at Sumitomo Mitsui Banking Corporation. Last year, he met Bessent as a member of the APEC Business Advisory Council (ABAC), the advisory body to APEC leaders.
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