The strengthening of the yen may force the Bank of Japan to raise interest rates as a "brake"? Goldman Sachs warns: the 130 level becomes a key point

The yen approaches a critical price level, Goldman Sachs warns that the Bank of Japan may "hit the brakes."

Recently, Goldman Sachs warned that if the yen continues to strengthen, approaching the 130 yen per dollar level, and the inflation outlook remains bleak, the Bank of Japan may have to consider pausing its interest rate hikes.

Economists at Goldman Sachs, including Akira Otani, analyzed in a report that a significant appreciation of the yen could squeeze the profits of Japanese exporters, while lowering import prices, suppressing domestic investment, and consequently weakening wage growth. These factors will pose challenges for the Bank of Japan to maintain its tightening policy.

The report was released at a time when global markets were reacting to U.S. tariff measures, leading to heightened risk aversion. This risk aversion has boosted investor demand for safe-haven assets like the yen. As a result, the yen rose 0.5% on Monday, approaching 142 yen per dollar, reaching its highest level since September.

The 130 yen level: The "trigger point" for pausing interest rate hikes

Goldman Sachs analysts further explained that once the yen rises to around 130 yen, the Bank of Japan may lower its inflation forecast for the fiscal year 2026 to about 1.5%, below its 2% inflation target.

Conversely, if the yen falls below 160 yen per dollar, a level that prompted the Bank of Japan to raise interest rates last July, the Bank of Japan may consider accelerating its rate hikes.

Goldman Sachs expects the yen to reach 135 yen per dollar by the end of the year.

This week, U.S. and Japanese officials will hold trade negotiations. Japan's Minister of Economic Revitalization Akira Akazawa stated last week that he would be open to discussions if U.S. Treasury Secretary Scott Besent raises currency issues.

It is noteworthy that U.S. President Trump named Japan last month, accusing the country of currency practices that are detrimental to the U.S. Although Japanese Prime Minister Shigeru Ishiba and other Japanese officials denied these allegations, political factors undoubtedly add complexity to currency fluctuations