The Japanese yen faces a significant downside risk, potentially weakening to 165 per dollar, if the Federal Reserve implements an interest rate hike this year.
Former Bank of Japan policymaker Sayuri Shirai outlined this scenario on Tuesday, emphasizing that the persistent divergence between U.S. and Japanese monetary policy remains a primary driver of currency volatility.
Shirai’s comments underscore the fragility of the yen’s recent performance.
Despite Tokyo’s explicit warnings that it stands ready to intervene in foreign exchange markets to curb excessive volatility, the currency’s strength has been largely driven by technical factors and short-term sentiment rather than a fundamental shift in the interest rate differential.
The prospect of a Fed hike would widen that differential, likely pressuring the yen lower regardless of intervention efforts.
This warning comes as the yen has recently extended its rally against the dollar, climbing higher after Japanese authorities signaled their readiness to act.