US warns against excessive yen volatility, calls for BOJ rate hikes

The U.S. Treasury Department has expressed concern over the persistent weakness of the Japanese yen, stating that excessive volatility in the currency is undesirable. The department noted that the yen's decline has continued even as the interest rate gap between the U.S. and Japan has narrowed. This situation has kept markets alert to the possibility of currency intervention by Japanese authorities, who have previously threatened action against excessively volatile moves.

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Monetary policy normalisation would help anchor inflation expectations and reduce excessive exchange rate volatility.

In its semi-annual currency report released on Thursday, the Treasury also urged the Bank of Japan (BOJ) to implement further interest rate hikes. The department argued that monetary policy normalization would help stabilize inflation expectations and curb excessive exchange rate volatility. The report highlighted that inflation has strained household purchasing power, despite notable increases in nominal wages.

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Indeed, yen weakness has persisted despite a narrowing of U.S.-Japan interest rate differentials.

The yen reached a 40-year low against the dollar on Thursday. The report further stated that the yen has fallen by 51% between the end of 2011 and April 2026, both in real effective terms and against the dollar, leading to what it described as "substantial yen undervaluation."

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While global factors such as financial market volatility and oil prices have likely affected the yen, excess volatility in the yen is undesirable.

While acknowledging global factors like financial market volatility and oil prices may have influenced the yen, the Treasury reiterated that "excess volatility in the yen is undesirable." The U.S. Treasury affirmed its commitment to close consultations with the Japanese Ministry of Finance on macroeconomic and foreign exchange matters. The Bank of Japan has signaled its readiness to continue raising rates after exiting its massive stimulus program in 2024, but concerns remain among investors about potential pushback against further hikes from the administration of Prime Minister Sanae Takaichi.

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The U.S. Treasury will continue its close consultations with the Japanese Ministry of Finance on macroeconomic and foreign exchange matters.