U.S. Treasury urges BOJ to keep raising rates as yen nears 40-year low

The U.S. Treasury Department flagged "excessive volatility" in the Japanese yen as undesirable in its semiannual foreign exchange report released this week, explicitly calling on the Bank of Japan to continue raising interest rates as the currency lingers near a 40-year low against the dollar.

The July 2026 report to Congress marks the first time Treasury has used the phrase in reference to the yen's persistent weakness, noting that the currency has continued to depreciate despite a narrowing of the interest rate gap between the United States and Japan. Treasury stated that further monetary policy normalization by the BOJ would help anchor inflation expectations and reduce excessive exchange-rate volatility.treasury

Yen at Four-Decade Lows

The USD/JPY pair has traded above 163 yen per dollar in recent sessions, its weakest level in roughly 40 years. The yen touched a fresh four-decade low of 162.84 on July 1 before recovering briefly after a weak U.S. jobs report. It has since drifted back toward those lows amid persistent interest rate differentials, with the Federal Reserve's policy rate sitting at 3.50%–3.75% compared to the BOJ's benchmark of 1.00%.TRADING ECONOMICS+4

Japan spent a record 11.73 trillion yen (approximately $73.5 billion) on currency intervention between late April and late May, according to Japan's Ministry of Finance. Finance Minister Satsuki Katayama said in early July that Tokyo was in "regular contact with Washington" on foreign exchange issues and remained ready to act.Reuters+1

BOJ Under Pressure to Move Faster

The Treasury report's language adds external pressure to a central bank already facing calls to accelerate its tightening cycle. Bloomberg reported on July 22 that BOJ officials are open to raising rates faster than the once-every-six-months pace that has defined its normalization since 2024. The BOJ raised its benchmark to 1.00% — the highest in 31 years — at its June meeting.Bank of Japan+3

Markets now price a 72% probability of another rate increase by October, according to overnight index swaps. The BOJ's next policy meeting is scheduled for July 30–31.ceomorningbrief.theedgemalaysia.com+1

A Shift in Washington's Tone

Treasury Secretary Scott Bessent first urged the BOJ to raise rates in a June 2025 semiannual report, calling yen appreciation a natural byproduct of policy tightening. The July 2026 report goes further by explicitly labeling the yen's volatility as undesirable — language that aligns Washington's position with Tokyo's own stated rationale for intervention.U.S. Department of the Treasury+2

The report kept Japan on Treasury's Monitoring List of economies whose currency practices merit close attention, citing a $55 billion bilateral trade surplus with the United States and a current account surplus of 4.8% of GDP. Treasury concluded that no major trading partner, including Japan, manipulated its exchange rate during the review period.treasury