Amid persistent yen depreciation, Masahiro Yamaguchi, Investment Research Head at Sumitomo Mitsui Trust Bank, noted that the current yen decline stems primarily from market expectations that "negative real interest rates will persist temporarily." Concurrently, the weaker yen supports earnings expectations for export-oriented firms, driving Japanese equities higher.
Yamaguchi emphasized that Bank of Japan Governor Kazuo Ueda "may need to adopt a notably hawkish tone" in the upcoming press conference to curb further yen weakness. He cautioned that if the yen continues depreciating, "the pace of rate hikes could become uncertain again."
This view highlights the complex dilemma facing Japan's monetary policy: while inflationary pressures and fiscal sustainability require rate hikes, an excessively strong yen could harm the export-driven economy, whereas excessive weakness risks amplifying imported inflation and eroding foreign investor confidence in Japanese bonds.
As of December 19, 2025, USD/JPY has approached the historically weak range of 157:1. Earlier, on December 1, the BOJ signaled clear hawkish intent by stating it would "consider the pros and cons of raising policy rates" at its meeting, fueling global expectations for Japan to exit its three-decade-long ultra-low rate regime.
However, as Yamaguchi observed, exchange rate dynamics have become a critical variable influencing the tightening pace. Should yen depreciation spiral uncontrollably, the BOJ may face renewed trade-offs between "stabilizing the currency" and "controlling inflation," potentially delaying its normalization timeline.
Comments