Treasury Urges Bank of Japan to Hike Rates Amid 40-Year Low Yen Slump

Treasury Urges Bank of Japan to Hike Rates Amid 40-Year Low Yen Slump​

The U.S. Treasury Department has strongly encouraged the Bank of Japan (BOJ) to continue its monetary policy tightening. The department stressed that further normalization is crucial to anchor inflation expectations and curb excessive volatility in the yen, as noted by a recent report released on Thursday.

Yen's Steep Decline Reaches 40-Year Low​

The Japanese currency recently hit a significant milestone, falling to a 40-year low against the U.S. dollar on Thursday. This rapid decline has heightened concerns among investors regarding potential intervention by Japanese authorities.

The Treasury Department reported that the yen has experienced a massive fall of 51% between the end of 2011 and the close of April 2026. Both in real effective terms and against the dollar, this plunge resulted in what the report termed as substantial undervaluation.

U.S. Treasury Calls for Policy Normalization​

The semi-annual currency report released by the Washington-based Treasury emphasized the persistent weakness of the yen despite a narrowing yield gap between U.S. and Japanese interest rates.

The U.S. Treasury noted that while global factors like higher oil prices and financial market volatility influence the currency, excessive swings in the yen are undesirable. The report reiterated its commitment to continuous close consultation with Japan's Ministry of Finance regarding macroeconomic and foreign exchange matters.

Inflationary Pressure Erodes Japanese Household Purchasing Power​

The report addressed the impact of inflation directly on Japanese households. It stated that rising prices have significantly eroded purchasing power, even for those who achieved notable gains in nominal wages.

Policy normalization by the BOJ is seen as a necessary step to address this situation. The Treasury suggests that further tightening would help anchor inflation expectations and reduce harmful exchange-rate volatility for consumers.

Global Context and Monetary Policy Dynamics​

The Bank of Japan (BOJ) ended its decade-long stimulus program in 2024, which occurred after inflation stabilized around the central bank's 2% target. The BOJ has since taken steps to raise interest rates multiple times.

Notably, the central bank increased its policy rate in June, lifting it to 1%, marking the highest level achieved in three decades. Despite these actions, investor sentiment remains cautious regarding further hikes. This caution is partly attributed to concerns that Prime Minister Sanae Takaichi's administration may resist additional rate increases due to its dovish stance on monetary policy.