U.S. Treasury "written guidance": The Bank of Japan should raise interest rates to support the yen

The U.S. Treasury rarely "guides" the Bank of Japan to raise interest rates. Japanese Finance Minister Katsunobu Kato responded that the details of monetary policy will be left to the Bank of Japan to decide.

According to media reports, the U.S. Treasury stated in its semiannual currency report released on Thursday:

"The Bank of Japan's policy tightening should continue to address domestic economic fundamentals such as economic growth and inflation, support the normalization of the yen's weakness against the dollar, and the structural rebalancing urgently needed in bilateral trade."

This report is the first assessment of Japan's exchange rate since Trump returned to the White House and may fuel market speculation about the Bank of Japan raising interest rates again later this year.

In response to U.S. pressure, the Japanese Finance Minister stated that the details of monetary policy will be left to the Bank of Japan to decide, and he will not comment on the views of foreign governments.

A former top Japanese currency diplomat believes that the real driving force behind pushing the yen to rise to 135-140 against the dollar by the end of the year does not come from political pressure from the White House, but from the structural convergence of U.S.-Japan interest rate differentials. The current exchange rate of the dollar against the yen is 143.99, up 0.32% from the previous trading day, indicating that the yen's weakness continues.

Japanese Finance Minister Responds: Details of Monetary Policy Will Be Left to the Bank of Japan to Decide

As the economy with the highest inflation rate among G7 countries, Japan's benchmark interest rate is only 0.5%, far below the levels of other developed countries.

In response to direct pressure from Washington, Finance Minister Katsunobu Kato stated that monetary policy falls within the jurisdiction of the Bank of Japan, and he will not comment on the views of foreign governments:

The details of monetary policy will be left to the Bank of Japan to decide.

Japan will continue to implement appropriate bond policies. There is no problem with the stable issuance of Japanese government bonds.

It is worth noting that the Japanese Ministry of Finance has intervened in the foreign exchange market multiple times in recent years to correct the excessive weakness of the yen, showing Tokyo's sensitivity to exchange rate issues.

Former Top Japanese Currency Diplomat: Structural Convergence of U.S.-Japan Interest Rate Differentials Becomes the Core Logic for Yen Strengthening

Mitsuhiro Furusawa, a former Japanese currency diplomat who has maintained close ties with current policymakers in various countries, stated in an interview with the media on Friday that the next move by the Federal Reserve is expected to be a rate cut, while the Bank of Japan is considering further interest rate hikes. This divergence in monetary policy direction will support the strengthening of the yen.

"It is not easy for policymakers to intentionally weaken the dollar," Furusawa pointed out. As a senior figure who served as the Vice President of the International Monetary Fund before 2021, he believes it is unclear whether the Trump administration explicitly adopted a weak dollar policy.

However, Furusawa emphasized that the real driving force behind pushing the yen to rise to 135-140 by the end of the year does not come from political pressure from the White House, but from the structural convergence of U.S.-Japan interest rate differentials:

"Since it has been clearly stated that tariffs are the main tool (for negotiations), I believe Washington does not need to rely too much on monetary means to achieve its goals."

The U.S. side hopes to avoid further appreciation of the dollar harming exports, while Japan hopes to prevent a weak yen from pushing up inflation. "On this point, both sides share the same view. This means the yen may gradually appreciate," Furusawa stated.

According to Wall Street News, Japan's chief negotiator and Minister of Economic Revitalization, Akizawa Ryozo, met with U.S. Secretary of Commerce Lutnick on June 5, and the two sides talked for 110 minutes. Akizawa strongly urged a reconsideration of U.S. tariffs; both sides discussed non-tariff barriers and trade expansion.

Are Yen Bulls Back? Wall Street Rebets on Yen Appreciation

The yen exchange rate has become an important component of the Trump administration's trade policy toolbox. Trump accused Japan in March of gaining an unfair trade advantage through currency depreciation; Treasury Secretary Scott Bessent previously stated that the strengthening of the yen is a natural trend as the Bank of Japan advances its interest rate hike process.

According to previous mentions by Wall Street News, recently, hedge funds and long-term investors are re-establishing positions betting on yen appreciation, reaching a five-year high. Antony Foster, head of G10 currency trading at Nomura International, stated that speculation about Japan possibly discussing exchange rates in tariff negotiations has attracted yen buyers back.

The Bank of Japan will hold its next policy meeting on June 16-17, and the market generally expects the benchmark interest rate to remain unchanged. However, the latest statements from the U.S. Treasury may support market expectations for a rate hike by the Bank of Japan within the year, putting greater external pressure on monetary policy decisions