Mizuho: External pressures may drive the Bank of Japan to further raise interest rates

According to a January 19 article by Nikkei News, speculation about U.S. foreign exchange policy may be a factor behind the Bank of Japan's sudden inclination to raise interest rates in January rather than March, as well as the Japanese government's apparent acceptance of this move.

Yasunari Ueno, Chief Market Economist at Mizuho, stated that, in other words, the Shigeru Ishiba government may have ample reason to believe that a rate hike by the Bank of Japan in January aligns with the U.S. government's desire to avoid a rapid depreciation of the yen, thereby paving the way for Ishiba's first meeting with Trump. This is suggested because all signs indicate that the new U.S. Treasury Secretary Scott Bessent supports and welcomes the normalization of Japan's monetary policy. It would certainly be inappropriate to make U.S.-Japan diplomatic relations the sole determining factor in the Bank of Japan's final decision, but in the current situation, it is not hard to imagine a return to the days when both the Japanese government and the central bank needed to consider "external pressures."

Mizuho's own view is that, given the current policy interest rate level does not seem to strongly stimulate the real economy, the Bank of Japan does not need to rush to raise rates, but must at least acknowledge that "external pressures" could indeed become a driving force for further "normalization" of Japan's monetary policy.

Mizuho pointed out that Bessent stated during the Senate Finance Committee hearing on January 16 that Trump's plan to impose high tariffs aims to combat unfair trade practices, increase federal government revenue, and enhance America's negotiating leverage (including on non-trade issues). He also claimed that if a 10% tariff were imposed, the dollar could appreciate by 4%, "so that the 10% tariff would not be passed on to consumers." He further asserted that "it must be ensured that the dollar remains the world's reserve currency."

In summary, the situation may be at least a bit more complex than it initially appears. If Bessent indeed supports the normalization of Japan's monetary policy and the Bank of Japan subsequently raises rates accordingly, the dollar-yen exchange rate is likely to weaken in a way that Trump would welcome, as he previously described the dollar as "too strong." However, at the same time, a stronger dollar may be the best means to prevent the burden of Trump's version 2.0 tariffs from falling too heavily on American consumers