Japan Faces Pressure to Accelerate Rate Hikes as Yen Continues to Struggle

Source: Coindoo Original Title: Japan Faces Pressure to Accelerate Rate Hikes as Yen Continues to Struggle Original Link:

Japan’s fragile currency is rapidly becoming the key variable shaping monetary policy, with some market participants now warning that the Bank of Japan may be forced into a more aggressive tightening cycle than previously expected.

According to Citigroup Inc., sustained weakness in the yen could push the central bank to raise interest rates multiple times this year, potentially doubling the current policy rate. The outlook reflects growing concern that negative real interest rates are undermining the currency and feeding domestic inflation pressures.

Key Takeaways

• Persistent yen weakness could force the Bank of Japan into faster and more frequent rate hikes this year.
• Citigroup sees negative real interest rates as the main reason the currency remains under pressure.
• Rising yields may eventually draw Japanese investment back home, reshaping capital flows.

Weak Yen Could Accelerate Policy Normalization

Citigroup’s Japan markets chief Akira Hoshino sees the exchange rate as the decisive trigger. If the dollar strengthens beyond the ¥160 level, he believes the Bank of Japan may respond with a quarter-point rate increase as early as April, lifting the overnight call rate to around 1%.

Further moves could follow in July, with the possibility of another hike before year-end if the currency remains under pressure. In Hoshino’s view, the underlying issue is clear: inflation continues to run above key government bond yields, leaving Japan stuck with negative real rates that discourage capital inflows and weaken the yen.

Exchange Rate Now Central to Inflation Outlook

For decades, Japan’s policymakers focused primarily on escaping deflation. That framework is now shifting. Rising import costs driven by a weak currency are increasingly affecting households, forcing officials to weigh the inflationary impact of exchange rates more heavily in their decision-making.

While many economists still expect the next rate hike to arrive later in the year, currency volatility could compress the timeline. Market pricing reflects this uncertainty, with traders increasingly positioning for at least two rate increases by December, according to derivatives linked to policy expectations.

The yen has already tested policymakers’ patience, trading near multi-decade lows and briefly approaching levels last seen more than a year ago. Hoshino expects wide swings to persist this year, with the currency fluctuating roughly between the high 140s and mid-160s against the dollar.

Repatriation Flows Could Follow Yield Shift

A sustained rise in Japanese interest rates could also have broader market consequences. If benchmark bond yields begin to exceed inflation, domestic institutions may reassess their heavy overseas exposure and redirect capital back into local fixed-income markets.

That potential shift would mark a significant change after years in which Japanese investors struggled to find attractive domestic assets. Hoshino argues that the lack of compelling investment options at home has been a major reason the yen has remained weak for so long.

Citigroup Positions for Japan’s Market Transition

Hoshino, who stepped into his current role earlier this year after more than three decades in financial markets, is also focused on positioning Citigroup to benefit from Japan’s evolving environment. The firm’s markets division already contributes a meaningful share of its global revenue, and closer coordination with investment banking teams is now a strategic priority.

As deal activity picks up across Japan, Hoshino wants traders and bankers working together earlier in transactions, helping clients structure financing in a way that aligns funding needs with market demand.

For Japan’s policymakers and global investors alike, the message is becoming harder to ignore: as long as the yen remains under pressure, the era of ultra-loose monetary policy may be nearing a faster-than-expected end.