Although the surge in USD/JPY forced the Bank of Japan to raise its 2026 core inflation forecast from 2.0% to 2.2% — technically signaling the need for more aggressive rate hikes — the BoJ kept its policy rate unchanged at 0.75% last Friday.
This lack of resolve reflects how limited the BoJ’s room to maneuver really is. Raising rates faster than 25 basis points every six months would pose serious risks to Japan’s financial system. Just to put this into context, in 2025, debt servicing accounted for approximately 24.5% of the government’s budget.
For the same reason, the Bank of Japan merely reiterated that real interest rates remain deeply negative and that, if its growth and inflation forecasts prove accurate, it will continue to raise official interest rates only gradually, without offering any specific guidance.
Why did the yen strengthen then?
Apparently, the BoJ may have intervened in the currency market for the first time since July 2024, potentially in coordination with the US, if reports are true that the New York Federal Reserve conducted rate checks on USD/JPY around midday on Friday, asking traders at what levels the pair would trade if it entered the market.
The problem is that any Japanese intervention would almost certainly be only a temporary solution. The underlying structural problems remain unresolved: a huge public debt burden and a prime minister firmly committed to fiscal expansion.
If Japan fails to stabilize the situation, it could be forced to sell some of its US Treasury holdings, which would put upward pressure on US yields. At the same time, unwinding the yen carry trade — borrowing yen to invest in risky assets — could trigger a sharp rise in volatility, much as markets experienced in 2024 after the Bank of Japan’s surprise rate hike.
Finally, yet importantly, if the US ultimately decides to actively support the yen, the added pressure on the US dollar index could give gold another boost.
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