Faced with a pressured yen, the Bank of Japan may be inclined to raise interest rates again in the coming months.

Yusuke Matsuo, senior market economist at Mizuho Bank, said, " The Bank of Japan has outlined the logic that justifies further rate hikes should the yen continue to weaken. If necessary, appearances and speeches by hawkish policymakers could ultimately encourage market participants to consider the possibility of a rate hike as early as April or even March. "



The analyst said committee members will use their presence to prevent “unexpected” interest rate changes that could prove highly damaging.

He said, " Accordingly, we recommend paying close attention not only to the substance of what committee members ultimately have to say, but also to the exchange rate levels before and after each speech, as well as any shifts in tone regarding the outlook for interest rate hikes."

The yen has been under significant pressure as markets perceive the government's intention to keep the economy "hot" through tax cuts, increased spending, and encouraging the central bank to maintain the lowest possible interest rates for as long as possible. The yen has depreciated sharply since the new prime minister took office, and domestic interest rates have risen sharply. Takashi hopes to boost her popularity with the election scheduled for next week. Polls suggest she should consolidate her power with an easy victory. If the Bank of Japan indicates a willingness to raise interest rates, it could provide some offset to the yen's weakness.

Another upcoming yen-related risk event is the replacement of Asahi Noguchi, whose term on the Bank of Japan's policy board expires at the end of March. Takashi's choice of successor will send a strong message about how she believes the Bank of Japan's policies should be implemented.

The choice will be between "reflationists" and "hawks," with the former advocating for a longer, lower interest rate policy to stimulate the economy and inflation. However, Mizuho warns that if the market ultimately chooses the reflationists, "then we expect the yen to weaken further." This is because the market will sense the government's genuine intention to "reflation."

Recently, downward pressure on the yen has eased somewhat due to signs that Japanese authorities are preparing to directly intervene in the market to support the yen. However, without a significant fundamental shift in fiscal and monetary policy, such intervention will only delay the yen's depreciation.