US Pressure Shifts Expectations for Japan Interest Rates

The recent US Treasury Department intervention in Japan's foreign exchange market has sent shockwaves through Tokyo and significantly shifted expectations for Japanese interest rates.

In the past, the probability of the Bank of Japan raising interest rates was less than 30%, but after the unexpected joint action with the US, it now stands at almost 100%.

Bond markets are pricing in a one percentage point rise in borrowing costs to 2% by the third quarter of 2027, while JPMorgan is even more hawkish and expects Japanese interest rates to rise to 2.25% by the end of next year.

The key factor driving this change is US Treasury Secretary Scott Bessent's pressure on Japanese policymakers to take more forceful action to strengthen the yen.