Japanese Yen: Policy support for BoJ hikes – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad highlights USD/JPY trading just below 160.00 as Japan’s government signals support for faster Bank of Japan (BoJ) rate hikes, reinforcing narrowing US–Japan differentials and a lower USD/JPY case. Haddad argues the narrative that BoJ must tighten aggressively to strengthen Japanese Yen (JPY) is misleading, with fiscal risk and intervention risks key to future alignment.

Government backs quicker BoJ tightening

"USD/JPY is holding just under psychological resistance at 160.00. News that Japan’s government supports faster BoJ rate hikes reinforces the narrowing in US-Japan rate differentials and the case for a lower USD/JPY."

"Regardless, the narrative the BoJ needs to tighten more aggressively to strengthen JPY is misleading. US-Japan 2-year rate differentials narrowed sharply in 2025 as the BoJ raised rates, yet USD/JPY moved higher."

"That divergence is largely explained by a material rise in Japan’s fiscal risk premium."

"Market concerns over Japan fiscal profligacy have since stabilized, reflected by the consolidation in the 10-year JGB term premium. Together with the threat of further joint US-Japan FX intervention, and a less troubling energy outlook, should help realign USD/JPY with rate differentials."