US Treasury Says Yen Is Deeply Undervalued, Urges Bank of Japan to Continue Rate Hikes
Published on July 23, 2026
Key Takeaways
The US Treasury's latest foreign exchange report indicates that the Japanese yen is significantly undervalued. The report urges the Bank of Japan (BOJ) to persist with interest rate hikes, suggesting that such policy normalization could help manage inflation and mitigate excessive currency volatility.
Yen's Undervaluation and Monetary Policy
The US Treasury has expressed concerns regarding the persistent weakness of the yen, despite a narrowing interest rate gap between the US and Japan. The semiannual foreign exchange report emphasizes that further tightening of monetary policy by the BOJ could stabilize inflation expectations and limit excessive fluctuations in the exchange rate.
Since the end of 2011, the yen's real effective exchange rate and its value against the US dollar have decreased by approximately 51%, leading the Treasury to conclude that the currency is substantially undervalued. Although nominal wages in Japan have increased, inflation continues to diminish household purchasing power, reinforcing the need for additional rate hikes by the BOJ.
Current Exchange Rate and Intervention Risks
As of the report, the US dollar was trading close to JPY 164, positioning the yen near its weakest level in four decades. Japanese officials have indicated readiness to intervene in the currency markets if volatility escalates. The Finance Minister reiterated that intervention remains a viable option if the dollar surpasses the JPY 160 threshold, as seen in previous months.
Inflation Data and Future Rate Hikes
Recent inflation data has bolstered expectations for further BOJ rate increases later in the year. The core consumer price index in Japan rose by 1.6% year-on-year in June, marking the first acceleration in three months. This increase, alongside a 1.7% rise in a measure excluding fresh food and energy, suggests a strengthening inflationary environment.
Despite these inflationary pressures, economists largely anticipate that the BOJ will maintain current interest rates during its upcoming policy meeting on July 31, as officials evaluate the effects of prior tightening measures. However, market expectations for additional rate hikes are growing, with many analysts predicting the next increase could occur in October or December, contingent on economic data and market conditions.