US Treasury urges Japan to further raise interest rates to stabilize the yen, stating that the yen is "significantly undervalued"

1. In the semi-annual exchange rate report released on Thursday, the US Treasury Department stated that although the US-Japan interest rate differential has narrowed somewhat, the yen remains weak, and explicitly warned that excessive volatility in the yen is "not desired by any party." The report comes as the yen/dollar exchange rate is hovering near a forty-year low. 2. The report calls on the Bank of Japan to further advance monetary policy normalization, pointing out that inflation has put pressure on household purchasing power despite nominal wage increases. The Treasury Department stated, "Monetary policy normalization will help anchor inflation expectations and reduce excessive exchange rate volatility," signaling US support for the BOJ to continue raising rates. 3. The report pointed out that from the end of 2011 to the end of April 2026, the yen depreciated by about 51% both in terms of effective real exchange rate and against the US dollar, leading to a "significant undervaluation of the yen." The report specifically noted that, even with the narrowing US-Japan interest rate spread, the yen continues to weaken, indicating that the factors driving its depreciation extend beyond just the interest rate differential. 4. On the issue of currency intervention, the US Treasury Department said it would continue to have close consultations with Japan's Ministry of Finance on macroeconomic and foreign exchange topics. This stance is seen as tacit approval for potential intervention by Japanese authorities, while also leaving room for coordination between both sides on exchange rate issues. 5. Despite the Bank of Japan having raised policy rates in June to a 31-year high of 1% and signaling further rate hikes, investors continue to sell the yen. The market is generally concerned that the dovish stance of Prime Minister Sanae Takaichi's government may result in a cautious approach to further rate hikes, weakening medium- and long-term support for the yen.