Summary of Key Points
The Japanese yen has been weakening recently, approaching the 159 level (just a step away from the psychologically significant 160 level). Although joint intervention by the United States and Japan briefly boosted the yen, it soon fell back. This has forced the Bank of Japan (BOJ) to raise interest rates. The market and former officials generally expect a rate hike in September, followed by another one in January next year, with the government also expressing its support for this move. Meanwhile, there is a clear divergence in monetary policies among the world's major central banks: the Federal Reserve (Fed) and the Bank of England (BOE) are likely to remain inactive this year, while the European Central Bank (ECB) and the BOJ may continue to raise rates. This divergence is driven by differences in inflation and economic growth among countries, as well as the chain effects of geopolitical conflicts (such as the situation in the Middle East) on oil prices and inflation.
1. The Yen's Continuous Decline: Why Does Joint Intervention by the US and Japan Fail?
The yen has tumbled significantly, approaching a 40-year low. After the first joint intervention by the US and Japan, the yen briefly rose to 157.4 but then fell back to 159. Why is the intervention so ineffective?
The key issue lies in the interest rate differential: interest rates in the US are high (3.5%-3.75%), while those in Japan are almost zero (or at extremely low levels). As a result, funds naturally flow to the US to earn higher returns, leading to the selling of yen. Short-term intervention can only stabilize the exchange rate temporarily; long-term, adjustments to monetary policy—specifically, raising rates—to narrow the interest rate gap between the US and Japan—are necessary to stop the yen's decline.
Additionally, Japan is a major importer, relying on imported energy and food. A weaker yen increases import costs, which in turn drives up domestic prices (core inflation was 1.8% in July, rising for two consecutive months). This puts pressure on the BOJ: if it does not raise rates, inflation will worsen; raising rates will help curb inflation and support the yen.
2. The BOJ Cornered: Is It Really Necessary to Raise Rates?
The BOJ is in a difficult position:
- Internal Pressure: Inflation is rising, and import costs are soaring. Ando Masashi, a former member of the BOJ's rate-setting committee, says that if rates are not raised, the yen will fall further, and inflation could exceed 2.5% (with the Middle East conflict potentially driving up oil prices), increasing the cost of living for consumers.
- External Support: US Treasury Secretary Janet Yellen has publicly expressed hope for a rate hike by Japan, providing the BOJ with some leverage. Previously, the Abe government favored economic stimulus and was less supportive of rate hikes, but now that the US has spoken out, the government cannot oppose them and has even indicated support for a rate hike in September or October.
- Market Expectations: Market expectations for a rate hike in September are as high as 80%, and these expectations have already been factored into market prices. If the BOJ does not raise rates, the market may see this as a sign of weakness and sell the yen, exacerbating the situation.
Therefore, Ando Masashi believes that a rate hike is likely in September, followed by another in January next year, with interest rates possibly reaching 1.25% or even higher.
3. Divergent Policies Among Global Central Banks: Some Raise Rates, Some Stay Put?
The policy directions of the world's major central banks are clearly diverging:
- Fed: Most analysts (77%) expect no rate hikes this year, with CME market tools indicating a 58.6% probability of keeping rates unchanged in September. This is because US inflation data is improving, and economic activity has softened, suggesting no need for further rate hikes.
- BOE: Nearly 90% of analysts expect the BOE to maintain rates at 3.75% throughout the year. Although inflation in the UK is still at 2.6%-2.9%, wage growth has slowed, and service sector inflation has declined, so there is no immediate need to raise rates.
- ECB: The ECB is likely to continue raising rates. With inflation in the eurozone expected to reach 2.4% in 2026, above the target of 2%, rate hikes are necessary to curb inflation.
- BOJ: The BOJ must raise rates due to the weak yen and high inflation.
The reason for this divergence is that each country's situation is unique: the US economy is resilient, and inflation is declining; inflation in Europe has not yet met targets; Japan is "forced" to raise rates; and although inflation is rising in the UK, economic growth has slowed.
4. Geopolitical Conflicts: A Chain Reaction of Oil Prices → Inflation → Monetary Policy
The Middle East conflict is a significant factor:
- The conflict could drive up oil prices, which are a crucial component of the global economy. Rising oil prices will in turn affect inflation, leading to increases in the cost of goods such as gasoline and plastics.
- Union Investment notes that higher oil prices could lead to higher inflation and force central banks to change their policies. For example, Europe and Japan already face inflationary pressures, so higher oil prices would make rate hikes even more necessary. Although inflation in the US is declining, a sharp rise in oil prices could still influence policy.
Anben Investment also points out that high geopolitical risks and frequent inflationary shocks could result in more frequent rate adjustments by central banks (e.g., the BOJ may raise rates more frequently than expected).
5. Market Reactions: Most Expectations Have Been Factored In, but There Is a Potential Risk
The market has already adjusted to these policy changes:
- Japanese Market: The Nikkei 225 index has performed well this year, indicating that investors have accepted the prospect of rate hikes without significant market volatility.
- US Market: There were concerns about additional rate hikes by the Fed, but these expectations have eased, and there is no pressure on credit markets or the stock market.
However, there is a potential risk: At this week's Jackson Hole meeting, Fed Chairman Jerome Powell may mention the Fed's plan to reduce its balance sheet (i.e., selling bonds to withdraw money from the market). If he indicates a continuation of this policy, market liquidity could tighten, and the stock market could decline, as Powell has opposed the idea of excessive money leading to asset price bubbles.
In summary, a rate hike by the BOJ is almost inevitable, and the divergence in global central bank policies will continue. Geopolitical conflicts represent the biggest source of uncertainty. Individuals should pay attention to changes in the yen exchange rate (which affects costs of overseas shopping and studying), oil price trends (which affect fuel prices and daily consumption), and short-term stock market fluctuations, especially if the Fed decides to reduce its balance sheet.