The Bank of Japan had previously signaled an interest rate hike to narrow the gap with U.S. rates. However, by the time Japanese monetary authorities confirmed the increase on Friday, September 18, the Federal Reserve had already preempted the move with another hike, further widening the disparity between the two economies.
The Japanese increase was 0.25 percentage points. This brought Japan’s rates to 1.25%, a 31-year high that concluded decades of ultra-loose monetary policy. The decision was widely anticipated by analysts: U.S. Treasury Secretary Scott Bessent had repeatedly pushed for a stronger yen, while Bank of Japan (BOJ) Governor Kazuo Ueda had expressed support for the measure. The primary goal of the rate hike was to curb the depreciation of the Japanese currency and bring investors, thereby strengthening the yen and making U.S. dollar investments more viable.
Bessent initiated his current campaign for a stronger yen with the joint intervention on July 31, when the United States and Japan conducted massive purchases. This effort successfully lifted the Japanese currency from 164 yen to the U.S. dollar—its weakest level in 40 years—to 157 yen. It was the first coordinated defense of the yen between the two nations since 1998, with the American president characterizing it as a gesture of friendship toward Japan. In doing so, however, Donald Trump didn’t miss the opportunity for sarcasm: “Japan’s been very good to us, with the exception, of course, of Pearl Harbor.”
Shirai believes that the United States intervened for its own benefit, pointing to the nearly $1.2 trillion in U.S. Treasury bonds held by Japan. Selling those assets to repatriate yen would drive up the cost of U.S. debt.
In an export-driven economy like Japan’s, which relies heavily on imported materials, currency fluctuations have complex consequences. For companies like Toyota, a one-yen drop in the currency’s value against the dollar boosts operating profit by 50 billion yen (approximately $317 million), according to a study by the local news agency Jiji Press. However, these gross foreign exchange gains are offset by dollar-denominated payments for steel, electronic components, lithium for batteries, freight, and insurance.
Another expert consulted, Tsuyoshi Ueno, an analyst at the NLI (Nippon Life Insurance) Research Institute, points to the last two decades of wage stagnation, during which the average Japanese citizen lost purchasing power while the country was flooded with tourists whose spending power was amplified by a weak yen. He adds that even though wages have started to climb, the pressure on households remains due to rapid currency depreciation. “Japan is at a turning point,” he warns.
The U.S. Treasury’s support for the yen, he argues, stems from Japan’s inability to stop the currency’s slide despite repeated unilateral interventions since 2022. “It was necessary to send a stronger warning to speculators,” he adds, suggesting that, despite Bessent’s defense of American interests, “he may have created a sense of indebtedness and gratitude in Japan.”
Back in 1999, when the BOJ lowered its interest rates to zero, the Japanese currency became a favorite for “carry trades” (borrowing in yen to invest in higher-yielding assets). This fueled one of the largest speculative operations in the global financial system.
Ippei Fujiwara, a professor of macroeconomics at Keio University and the University of Tokyo who served as an economist with the BOJ from 1993 to 2011, describes the joint intervention as an “alignment of interests” between Japan and the United States. His primary concern is the fiscal sustainability of a nation with a debt “whose ratio to GDP is 250%,” a figure encompassing sovereign bonds and all of Japan’s government debt. Fujiwara fears that the rate normalization process, while necessary to fight inflation, will increase debt-servicing costs and trigger unexpected surges in the sale of new Japanese government bonds (JGBs). He emphasizes the need to monitor who exactly bears this fiscal burden, citing demographics.
Although nearly 90% of Japan’s debt is held by its own citizens, Fujiwara warns that this financing has historically relied on the savings of baby boomers, who are now around 75 years old. Facing significant expenses for medicine and care, they can no longer accumulate wealth. Under the professor’s scenario, Japan will eventually become dependent on less-predictable foreign investors.
Rate hikes on the horizon
Ueno, from the NLI Research Institute, outlines a forecast for the coming months featuring two 0.25 percentage point interest rate hikes in 2027—one in January and another in July—which would bring Japan’s interest rate to 1.75%. The U.S. Federal Reserve’s increase announced on September 16 was also 0.25 percentage points. By maintaining rates in the average range of 3.87%, the Fed keeps them approximately 2.6 percentage points above the BOJ’s rates.
“There’s a slightly greater resolve when it comes to containing the yen’s depreciation,” Ueno concludes. Professor Shirai, meanwhile, anticipates two similar rate hikes in December of this year and in March of 2027.
Nevertheless, the academic views the expectation that interest rates will reach levels near 2% as unrealistic. This is due to the direct impact such a move would have on Japanese household mortgages, of which, she notes, more than 70% are based on variable rates reviewed every six months.
Despite the pressure being applied to the Bank of Japan by Washington and Takaichi, Shirai supports the monetary authority’s technical independence, although she fears that the public may not share that sentiment.
