Markets are increasingly anxious about a potential risk in Japan: slipping into a negative spiral where rate hikes lag inflation and a weak yen pushes up prices. That warning comes from MUFG’s top markets executive, who says this tail risk could fuel a broader inflation-and-currency depreciation cycle if not addressed.
Right now, markets are largely pricing in a roughly 90% chance of a Bank of Japan rate increase this month, shifting focus to how the central bank communicates its longer-term policy path. MUFG sits among Japan’s largest players in foreign exchange and is the biggest holder of Japanese government bonds among major banks.
If the BOJ cannot anchor expectations for further tightening beyond the upcoming move, and if government spending rises to mollify voters frustrated by inflation, the yen could weaken further. That would feed into higher import costs and a self-reinforcing loop of rising inflation and currency depreciation, Seki warned in an interview with Reuters.
Even with narrowing rate differentials versus the United States, the yen has remained weak, hovering around 155 per dollar. Market sentiment attributes part of this weakness to expectations that Prime Minister Sanae Takaichi’s reflation stance could limit additional BOJ tightening.
Seki emphasized the need to remove Japan’s persistently very low real interest rates. The BOJ should move early and steadily toward monetary normalization to prevent a vicious cycle where insufficient tightening allows yen depreciation to push inflation higher.
Looking beyond December, Seki expects a gradual normalization path: rate increases of about 25 basis points roughly every six months, assuming economic and price trends align with the central bank’s projections. The terminal rate—where the tightening cycle would end—is projected to be between 1.25% and 1.5% by mid-2027, with risks skewed higher if inflation stays stubborn. The BOJ has suggested that Japan’s nominal neutral rate lies between about 1% and 2.5%.
On MUFG’s strategy for Japanese government bonds, Seki said the bank has been cautiously rebuilding positions since the benchmark 10-year yield rose above 1.65%. If yields move above 2%, MUFG plans to accelerate its bond purchases, focusing mainly on 10-year instruments, in line with higher interest rates. The bank has sizable capacity for purchases given its current restrained risk exposure.
What do you think about the risk of a negative spiral for Japan’s economy? Should the BOJ act sooner to prevent yen depreciation, or is patience warranted given global rate dynamics? Share your views in the comments.
