Takehiko Nakao, former Vice Minister of Finance for International Affairs, recently publicly urged the Bank of Japan (BOJ) to raise its benchmark interest rate at every subsequent monetary policy meeting, aiming to push the policy rate above 2%. He believes this move would not only effectively narrow the interest rate gap between Japan and the United States but also serve as the key to alleviating the ongoing depreciation pressure on the yen.

Nakao pointed out that although Japan's current policy rate stands at 1%, the real interest rate remains in negative territory against the backdrop of an inflation rate of around 2%. This presents a stark contrast to other major global economies where real interest rates are positive. He further emphasized that raising the policy rate to 2.25% or even 2.5% is entirely reasonable in the current economic environment.

This statement comes at a time when the market is highly sensitive to the BOJ's next move. Although the BOJ held rates steady at its July meeting, Governor Kazuo Ueda subsequently signaled his focus on upside risks to inflation, leaving room for action as early as September. Currently, swap market data shows that traders' expectations for a rate hike at the BOJ's mid-September meeting have climbed to 79%. Some observers have even begun to discuss whether the central bank will adopt a more aggressive tightening strategy, such as a single large rate hike or consecutive hikes within the year.

In terms of market performance, although the yen has recently rebounded, its exchange rate against the U.S. dollar is still hovering around 159, remaining far below its average level over the past decade. Meanwhile, the yield on Japan's 10-year government bond has hit a 30-year high of 2.91%, reflecting strong expectations in both the bond and foreign exchange markets for a shift in monetary policy.

To curb excessive weakness in the yen, the United States and Japan jointly intervened in the foreign exchange market at the end of July. Nakao frankly admitted that while intervention can temporarily halt the yen's decline, fundamentally solving the problem must rely on interest rate hikes at the monetary policy level. He specifically noted that U.S. Treasury Secretary Scott Bessent has recently emphasized on multiple occasions the importance of sound monetary policy in stabilizing the yen, indicating that the U.S. prefers Japan to address the exchange rate issue through rate hikes rather than relying solely on foreign exchange intervention.

However, Nakao also added that Japan remains fully confident in managing fluctuations in the foreign exchange market. Currently, Japan holds massive foreign exchange reserves of approximately $1.2 trillion, meaning the authorities still have ample ammunition to intervene in the market if necessary.