Citigroup's warning: Yen's fate could trigger a BOJ rate hike trio in 2026. Here's the twist: It all hinges on USD/JPY's dance with 160.
Citigroup's expert, Akira Hoshino, predicts a bold move from the Bank of Japan (BOJ) if the yen's weakness lingers. The BOJ might hike interest rates not once, but thrice in 2026, effectively doubling the current policy level. This scenario underscores the growing influence of exchange rates on Japan's monetary policy decisions.
In a revealing Bloomberg interview, Hoshino attributes the yen's decline to negative real interest rates, where yields lag behind inflation. He suggests that for the BOJ to steer the yen's course, rate hikes might be inevitable. Specifically, if USD/JPY surpasses the ¥160 mark, it could prompt an April hike, pushing the overnight call rate to 1% (a 25bp increase). This could be followed by another 25bp hike in July and potentially a third hike by the year's end if the yen remains weak.
But here's where it gets controversial: This timeline is more aggressive than the consensus. Most analysts predict the next BOJ move to be months away, often targeting mid-year rather than an April surprise. Reuters, however, hints at a potential April twist, suggesting some policymakers might act sooner if the weak yen fuels inflation. Is this a sign of a divided BOJ?
Hoshino also highlights a potential shift in domestic investment patterns. If Japanese yields, particularly the 10-year yield, rise above inflation, domestic institutions might redirect funds from overseas back into Japanese fixed income. The weak yen, he argues, is partly due to the lack of appealing yield options within Japan.
In essence, Citigroup's narrative positions USD/JPY levels, especially above 160, as a potential trigger for accelerated BOJ normalization, even if the baseline approach remains gradual. Are we witnessing a new era of exchange rate-driven policy decisions?
