Bank of Japan should raise rates at every meeting, ex-currency chief says
Published Mon, Aug 17, 2026 · 12:47 PM
THE Bank of Japan should raise its benchmark interest rate at every meeting, with the goal of taking the rate above 2 per cent in order to narrow the rate differential with the US and ease pressure on the yen, a former Finance Ministry official said.
“Real interest rates are still negative even after Japan has raised its policy rate to 1 per cent, while they are positive in every other country,” Takehiko Nakao, who was vice-finance minister for international affairs until March 2013, said on a TV Tokyo programme on Monday (Aug 17).
Nakao added that it wouldn’t be unusual for Japan’s policy rate to reach 2.25 per cent or 2.5 per cent, given inflation of around 2 per cent.
His comments come as traders focus on the timing and pace of further BOJ hikes.
After holding the policy rate at 1 per cent in July, Governor Kazuo Ueda flagged upside risks to inflation at his post-decision briefing, keeping the door open to a move as early as September. Prime Minister Sanae Takaichi’s government is also supportive of a near-term rate hike, according to people familiar with the matter.
As of midday in Tokyo on Monday, overnight-indexed swaps showed traders were pricing in a 79 per cent chance of a hike when the BOJ’s board sets policy on Sept 18.
Attention is also turning to whether the central bank could accelerate the pace of tightening given the yen’s weakness and elevated bond yields. BOJ watchers are weighing the possibility of a larger 50-basis-point move or a follow-up hike in December after an expected increase in September or October.
The yen is trading at 159.09 against the greenback on Monday in Tokyo, a little stronger than the four-decade low of 163.99 touched last month, but considerably weaker than its 10-year average of 126.09.
The 10-year government bond yield has climbed to 2.91 per cent, the highest in about three decades. US and Japanese authorities conducted coordinated intervention at the end of July in a bid to turn the tide for the yen.
“Japan could prevent the yen from weakening further by intervention, but it also needs to raise interest rates through monetary policy,” Nakao said, adding that the rate differential remains a major driver of the yen’s “extreme weakness.”
Nakao also pointed to comments from US Treasury Secretary Scott Bessent, who has repeatedly stressed the role of appropriate monetary policy in addressing yen weakness.
The remarks signal the secretary’s preference for higher interest rates rather than relying on currency intervention, Nakao said.
Still, Japan has ample reserves if it opts for more intervention.
“We still have US$1.2 trillion in foreign currency reserves, so I think there is still plenty we can do,” Nakao said. BLOOMBERG
