Japan's former top currency diplomat, Mitsuhiro Furusawa, issued a stark warning that the yen's current exchange rate is "clearly too weak," dragging down the economy by inflating import costs. He stated that intervention could occur at any time, and the Bank of Japan should quicken its pace of interest rate hikes to fundamentally reverse the yen's decline.
Furusawa, in an interview on Thursday, indicated that if the dollar-yen pair returns to levels seen before last month's joint intervention, Japan and the United States might once again step into the market together. "Intervention could happen again at any time, including coordinated action with the U.S.," he said. The dollar-yen pair is currently trading near 159.50, having fallen more than four full points from the 155.20 level it reached after the joint intervention, pushing it close to the trigger point for previous action.
Market expectations for a rate hike have also surged. According to Tokyo Tanshi, the probability of a September rate hike by the Bank of Japan has jumped sharply from 24% on July 30 to 76%. Goldman Sachs warns that if the Bank of Japan accelerates its tightening, there is still room for further unwinding of yen carry trades, and the spillover effects could impact global stock, bond, and currency markets.
Intervention "buys time," but yen has given back most of its gains
The joint intervention by Japan and the U.S. had pulled the dollar-yen pair from a 40-year low of 163.99 up to around 155.20. However, this effect is rapidly fading, with the exchange rate slipping back to near 159.37.
Furusawa stated bluntly that foreign exchange intervention can only "buy time" and cannot fundamentally reverse the yen's downward trend. "The issue is perhaps not about acting at a specific level like 160 or 162," he said, "but intervention could happen again at any time." He emphasized that if the yen returns to levels seen before last month's joint intervention, Tokyo and Washington might act together again.
Furusawa's background shows deep ties to the policy sphere. He served for a long time in Japan's Ministry of Finance, later held a vice-president position at the International Monetary Fund until 2021, and is currently the director of the Global Financial Affairs Institute at Sumitomo Mitsui Banking Corporation.
September rate hike bets rise to 76%; Furusawa says "should raise rates"
Since exiting its decade-long massive easing program in 2024, the Bank of Japan has maintained a pace of roughly two rate hikes per year, raising its policy rate to a 31-year high of 1% in June.
Furusawa expressed support for another rate hike in September but emphasized that a single action is of limited significance. "Most market participants expect the Bank of Japan to raise rates in September, and I believe it should," he said. "But more critical than the single rate hike is for the Bank of Japan to communicate the possibility of a faster pace of increases in the future."
The market has clearly perceived this signal. According to Tokyo Tanshi data, the probability of a September rate hike has skyrocketed from 24% on July 30 to 76%, significantly strengthening the expectation of a policy shift.
Ultimate rate seen at 1.5%-1.75%, rate hike path gradually unfolds
Regarding the long-term interest rate target, based on the Bank of Japan's estimate of the neutral rate being in a range of 1.1% to 2.5%, Furusawa speculated that the central bank's policy rate could ultimately rise to between 1.5% and 1.75%.
The rate hike path he outlined is: a hike in September, with the next move possibly falling in December or January next year, followed by another in the 2027 fiscal year (starting in April), provided the economy does not stall.
Furusawa also urged the government of Prime Minister Shigeru Ishiba not to interfere with the Bank of Japan's rate hike process and to fulfill its promises on fiscal sustainability. "The ideal outcome is to escape the situation where the yen is excessively sold off through monetary and fiscal policy, while growth strategies begin to show results," he said. "This would allow the yen to gradually appreciate over time."
Pressure from unwinding carry trades persists, spillover effects cannot be ignored
According to a report, Goldman Sachs strategist Karen Reichgott Fishman noted that the dollar-yen pair has retraced about half of its initial decline. This is because the current macro backdrop provides less support for the yen compared to the summer of 2024.
Goldman Sachs believes that although speculative short positions have been significantly reduced, there is still room for further unwinding if conditions are met. Should the macro and market environment shift to favor yen appreciation, positions could even turn net long, as seen in the pattern from July to August 2024.
Goldman Sachs also pointed out that if the Bank of Japan accelerates its tightening, it would narrow the U.S.-Japan interest rate differential and increase the cost of funding short yen positions. Even if the global economic growth environment remains unchanged, the yen could maintain its strength for a longer period. Once this mechanism is triggered, the spillover effects would directly impact liquidity conditions in global stock, bond, and currency markets.
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