Slow Bank of Japan rate hikes drive yen weakness as real wages rise for fourth straight month

Japan’s weak yen is being driven in large part by the Bank of Japan’s slow pace of interest-rate increases, according to Nomura Research Institute Chief Economist Richard Koo, even as fresh data and market pressure are building the case for tougher policy. His comments came as other reports showed Japanese real wages rising for a fourth straight month and suggested policymakers may soon face pressure to act more decisively to support the currency.

Koo said the underlying problem is that the BOJ has moved too gradually compared with other major central banks, allowing the yen to stay under downward pressure. That view aligns with growing market debate over whether the central bank’s expected rate increase this month will be enough, or whether Japan may need a larger move to stabilize the currency and government bond markets, as Mitsubishi UFJ Asset Management warned.

The timing matters because Japan is already under scrutiny after likely drawing on foreign securities holdings, including US Treasuries, to finance a record round of currency-market intervention over the past month, according to a Bloomberg report. That intervention appears to have temporarily slowed the yen’s decline, but it also risks drawing attention from Washington if Japan is seen as leaning too heavily on reserve assets to defend its currency.

At the same time, domestic conditions are becoming somewhat more supportive of tighter policy. Bloomberg Economics reported that Japanese real wages rose for a fourth consecutive month, the longest run of gains in four years, strengthening the argument for a BOJ hike this month. For policymakers, that combination of firmer wages and a weaker currency is significant because it suggests inflationary pressures could persist if monetary policy remains too loose.

Still, the debate is no longer simply about whether the BOJ will raise rates, but about whether a standard increase will be enough. Mitsubishi UFJ Asset Management said a larger or out-of-cycle hike cannot be ruled out if the yen keeps falling, while Koo’s comments reinforce the idea that the currency’s weakness is tied to the pace, not just the direction, of policy normalization.

The issue matters for households and businesses across Japan. A weaker yen can raise import costs for energy and food, squeezing consumers, while also affecting exporters, bond investors, and the government’s debt strategy. What happens next will depend heavily on the BOJ’s upcoming decision and on whether officials judge that modest tightening is sufficient to restore confidence in the currency.