BENGALURU, June 23 - The Japanese yen faces renewed downside if the Federal Reserve tightens policy further this year, according to Sayuri Shirai, a former policymaker at the Bank of Japan now teaching at Keio University. Shirai told the Reuters Global Markets Forum that the currency could slide toward 165 per dollar as a result of widening interest-rate differentials between the United States and Japan and limited evidence that Tokyo will step in to halt the decline.
"The dollar/yen rate may gradually move toward 163-165," Shirai said. "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 recently hit a two-year low of 161.92 against the dollar and was last quoted at 161.45. A move to 165 would mark the currency's weakest level since 1986. Speculative positioning in futures markets has reflected the slide: the most recent data showed net short positions on the yen reached 150,132 contracts, the highest level since July 2024.
Market reaction to policy actions in Tokyo has been muted so far. The Bank of Japan raised its policy rate by a quarter point to 1% - the highest level since 1995 - and authorities undertook record foreign-exchange intervention. Nonetheless, Japan's policy rate remains well below the Federal Reserve's 3.50% to 3.75% range, leaving rate differentials strongly biased against the yen.
On the U.S. side, a hawkish stance under new Fed Chair Kevin Warsh has revived expectations of further rate hikes. Traders are pricing in roughly two quarter-point increases by year-end and assign about a 75% probability to a hike by September. Several banks that had previously forecast steady U.S. policy, including BofA Global Research and Deutsche Bank, now anticipate at least one Fed increase within the year.
Shirai expects the BOJ to add another quarter-point lift in either October or December. She noted that the recent fall in oil prices has not provided material support to the yen. "Markets expect another rate hike to 1.5% next year," she said. "This is the maximum BOJ could do, I think."
By contrast, Jesper Koll, global ambassador for Monex Group Japan, projects a considerably higher terminal rate for Japan, forecasting a terminal rate around 3% by early 2028. He argued that a simple application of a Taylor Rule - using Japan's potential growth of 1% and an inflation target of 2% - points to a neutral policy rate near 3%.
"The relentless weakness of the yen clearly demonstrates retail and professional investors think BOJ is behind the curve," Koll said.
Tactics to steady the currency have already been costly. Tokyo spent a record 11.7 trillion yen - about $72.44 billion - on foreign-exchange intervention between late April and early May in an effort to arrest the yen's slide.
Shirai said it is uncertain whether the finance ministry will intervene again. She pointed to remarks from U.S. Treasury Secretary Scott Bessent, who had signaled that the BOJ needed to raise rates to curb depreciation of the yen. Shirai said intervention typically involves selling U.S. Treasury securities, and Bessent is reportedly reluctant to take steps that would affect U.S. Treasury yields.
Domestic fiscal dynamics in Japan have also weighed on investor sentiment. Authorities are moving toward a temporary reduction in the consumption tax on food to 1% from 8% without providing a clear plan for how the measure would be funded. Prime Minister Sanae Takaichi's spending proposals have left markets cautious, even as BOJ rate-hike expectations, inflationary pressures and fiscal uncertainties keep Japanese government bond yields elevated.
Shirai warned of the potential fiscal implications of higher yields. "We wonder how she (Takaichi) will do expansionary fiscal policy without issuing JGBs," she said. "Markets expect the 10-year (Japanese government bond) yield will move up to 3% or higher. This will really affect MOF interest payments."
The benchmark 10-year Japanese government bond yield was last at 2.660%.
Key context and market implications
- The dollar's strength and the widening U.S.-Japan policy-rate gap are primary drivers of yen weakness.
- Speculative futures positioning and record FX intervention spending underscore market conviction and the cost of defending the currency.
- Domestic fiscal measures and elevated JGB yields add pressure on Japanese asset markets and government finances.