Central Bank Dilemma Under Yen Depreciation: Can Three Rate Hikes Reverse the Exchange Rate Trend?

【BlockBeats】Citibank Japan Market Analyst Hoshino Akira recently pointed out a noteworthy risk: if the yen continues to weaken, the Bank of Japan may have to adopt aggressive rate hikes this year.

According to Hoshino’s forecast, once the USD/JPY exchange rate breaks through the key level of 160, the central bank is likely to act for the first time in April, raising the unsecured overnight borrowing rate by 25 basis points to 1%. Subsequently, if the yen’s exchange rate still shows no signs of improvement, a second rate hike of the same magnitude could follow in July, with a third possible hike before the end of the year.

Hoshino’s view is straightforward: the fundamental reason for the yen’s continued depreciation is that real interest rates are negative. When real interest rates fall into negative territory, the attractiveness of holding yen diminishes significantly, and capital will naturally flow toward assets with higher yields. To change this situation, the Bank of Japan has no choice but to raise interest rates to boost the relative value of the yen.

Looking at the exchange rate outlook, Hoshino expects the yen’s volatility range this year to remain between 150 and 165, slightly below the breakout point of 160. The implicit logic behind this judgment is: before the central bank’s policy adjustments, pressure on the yen still exists; after the adjustments, the exchange rate is expected to gradually stabilize. For traders concerned with global liquidity and capital allocation, the Bank of Japan’s series of actions could become an important variable influencing market risk appetite.