Rate hike looms in Japan amid US pressure

The Bank of Japan appears to be approaching another rate hike at its June meeting. Despite growth now projected at just 0.5% for 2026, the institution must now contend with imported inflation that is weighing on domestic demand and complicating its monetary policy trade-off.

In April, the BoJ maintained rates at 0.75%, preferring to wait and gauge the impact of the Middle East conflict on the Japanese economy. However, the internal debate had already intensified, with three of the nine board members voting in favor of a further quarter-point hike.

The dilemma has become clearer since the revision of economic forecasts. The Bank of Japan halved its growth estimate for 2026 to 0.5%, in a move reminiscent of the trend seen in Germany. At the same time, its core inflation forecasts were raised to 2.8%, compared to 1.9% previously. While wages are rising, households remain under pressure. In March, consumer spending fell by nearly 3%, more than expected, marking a fourth consecutive monthly decline.

Japan thus finds itself facing the classic scenario of an energy shock. A central bank must choose between supporting decelerating activity or containing inflation that threatens to become entrenched. See also: Rate hikes set for June meeting | MarketScreener 

Yen weakness is also fueled by arbitragers borrowing in yen to purchase higher-yielding assets in other currencies. However, a weak yen drives up the cost of imports, particularly energy, on which Japan remains heavily dependent. In this context, a rate hike in June now appears highly probable. Furthermore, 10-year Japanese government bond yields reached a 30-year high this week, hovering around 2.7%.

This monetary pressure is also unfolding within a diplomatic framework. Scott Bessent visited Japan this week to meet with Prime Minister Sanae Takaichi and Finance Minister Satsuki Katayama, amid heavy pressure on the yen and suspicions of Japanese intervention in the foreign exchange market.

For Washington, the stakes are twofold. An excessively weak yen bolsters the competitiveness of Japanese exporters, particularly in the automotive and industrial goods sectors, at a time when the United States is seeking to reduce its trade deficits. In March, the Census Bureau ranked Japan second in terms of goods trade surplus with the US, behind China.

Scott Bessent also prefers to see the yen recover through economic fundamentals rather than through repeated interventions by the authorities. He did, however, deny having explicitly asked Japan to raise its rates. According to the Financial Times, Tokyo has reportedly spent over 60 billion dollars in the last two weeks to support its currency.

USD/JPY

The 160 yen per dollar threshold now appears to be a line in the sand for Japanese authorities. Tokyo has secured the support it sought, as Scott Bessent implicitly validated Japanese market interventions.

With rates raised to 1%, the Japanese economy would confirm its transition by returning to a level the country has not seen in over 30 years. The economy is reconnecting with inflation and wage growth. The OECD even anticipates several successive hikes, with rates potentially reaching 2% by the end of 2027.