Yen hits 40-year low as government adviser urges more BOJ rate hikes

The Japanese yen sank to 162.84 per dollar on Wednesday, its weakest level since December 1986, as rising U.S. Treasury yields and expectations of Federal Reserve rate hikes widened the interest rate gap between the two economies. The fresh four-decade low has intensified speculation that Tokyo may again intervene in currency markets after spending a record 11.7 trillion yen in April and May to prop up the currency.cnbc+2

Calls for Continued Tightening

On Thursday, Toshihiro Nagahama, a member of a government economic panel and chief economist at Dai-ichi Life Research Institute, called on the Bank of Japan to continue raising interest rates at a moderate pace to address excessive yen weakness. Nagahama, known as an economic aide to Prime Minister Sanae Takaichi, said the BOJ should raise its policy rate — currently at 1% following a June 16 hike — two more times at intervals of once every six months.finance.yahoo+1

He projected Japan's nominal neutral rate at around 1.5% and said delaying rate hikes "would cause excessive decline in the yen currency and hurt households more," according to Reuters.reuters+1

Balance Sheet Unwinding Accelerates

Separately, data released by the BOJ showed Japan's monetary base contracted 13.7% year-on-year in June to 559.2 trillion yen, far exceeding the market consensus of a 10% decline. The figure marks the sharpest annual drop since the central bank began tapering its asset purchases and reflects the accelerating unwinding of the BOJ's massive balance sheet built during years of ultra-loose policy.bitcoinworld+2

The monetary base had already fallen 12.2% in May and declined for the first full year in 2025 for the first time since 2007.investinglive+1

Intervention Watch

Despite the BOJ's June rate hike to 1% — the highest since 1995 — the yen's slide has continued, driven by what CNBC parent Comcast ↘ 0.95% described as a fundamental mismatch: U.S. rates remain well above Japan's, sustaining the carry trade that has pressured the currency for over two years. Traders see a 67% chance of a Fed rate hike in September, up from 20.5% a month ago, according to the CME FedWatch tool.kelo+1

The yen was trading around 162.50 per dollar in early Thursday trading, with markets awaiting U.S. non-farm payrolls data and bracing for possible intervention from Japanese authorities.reuters