Guy Ertz:

Hello, hi. My name is Guy Ertz. I'm Deputy Global CIO at BNP Paribas Wealth Management. Today, I'm with my dear friend Gurminder Singh alias Gavy. He is Investment Strategist Forex at BNP Paribas Wealth Management. Hello, Gavy.

Gurminder Singh:

Hello, Guy.

Guy Ertz:

Well, Gavy, the yen has been under pressure this year. We have seen levels that are actually historically quite low, quite weak levels for the yen. And of course, this poses some challenges also for the authorities. So, can you give us just an overview of what has happened in the past few months?

Gurminder Singh:

Yes, well, the yen weakness comes from Prime Minister Sanae Takaichi's expansion fiscal plan and a more accommodative monetary stance. Those views have obviously sparked worries about inflation and the long-term sustainability of Japan's public finances. When the yen falls, imports become more expensive, pushing up household living costs—a politically sensitive issue. The government has, of course, introduced subsidies to soften the impact, but those measures have raised concerns in the bond market, adding another layer of complexity to Japan’s outlook.

Guy Ertz:

Well, what we have seen in the past few weeks, actually in May, is also some intervention by the central bank, the Bank of Japan. We've seen some selling of dollar bonds, and of course, there are rumours of potentially more, even coordinated intervention with the U.S. What do you think about that speculation?

Gurminder Singh:

First, when the BOJ intervenes, it typically sells a portion of its security holdings, most often U.S. Treasuries. The latest data show a 74 billion U.S. dollar drop in the U.S. Treasury portfolio in May, but the real impact could come from a joint action with the United States. In January 2026, U.S. and Japanese regulators carried out a coordinated rate check. The market interpreted this as a signal of cooperation, and the USD/JPY grew fairly sharply. While a joint intervention looked like a powerful tool to support the yen, I remain skeptical. Historically, the United States has been reluctant to intervene directly in the foreign exchange market.

Guy Ertz:

There are obviously also some alternatives to an intervention, which is not a standard measure of course. So what kind of alternatives do you see?

Gurminder Singh:

So, first, in my view, another round of intervention would only become likely if the U.S. JPY were to breach the 165 level. But as you said Guy, fixed intervention cannot be counted on as a longer-term fix. A more sustainable alternative is the government's proposal to rebalance the government’s pension investment fund portfolio, shifting a larger share into the Japanese bonds and equity. This would naturally increase domestic demand for the yen and support its appreciation without direct market intervention. Of course, implementing such a policy would take time.

Guy Ertz:

Okay, but usually we talk a lot about interest rate differentials and the role of the central bank. So, to what extent do you think the central bank will be moving on with higher rates, and also having in mind that this could be a way to stabilize the yen?

Gurminder Singh:

So first, if we look at on the macro outlook, core CPI inflation, after removing the most government policy effect, is sitting just under 3%, which is still above the BOJ 2%  target. Combined with firm level pressure, a weaker yen, a likely expansionary fiscal measure, the risk of medium-term inflation overshooting remains elevated. That could push the BOJ toward a faster pace of tightening. In line with this inflation pressure, our outlook for the BOJ is that we expect the bank to raise the policy rate by roughly 25 basis points every four to five months. The next increase is likely to come in October, even if the September move is gaining momentum. At this pace, the policy rate will reach 2% by the end of 2027, and reach a terminal rate of 2.5% by September 2028. Keep in mind, rate hikes remain a very effective tool to support the currency and limit further yen weakness. Considering the expected rate hikes, developments around the pension fund, the possibility of FX intervention, and of course a gradual weakening of the dollar, our 20- month target for the USD/JPY pair stands at 155.

Guy Ertz:

Okay, thanks a lot, Gavy. So, just to summarize, we have a number of intervention possibilities or a number of policy measures that could be used to stabilize the yen. You talked about obviously the central bank as really the traditional way to influence the determinants of the exchange rate. So the sequence of a 25 basis point hike every 4 to 5 months, then possibly also some developments around the pension fund, and possibly as another measure, but more if we break more extreme levels, then we could even see interventions.

Okay, thank you for listening. If you enjoyed this episode, please like, share, and subscribe on Apple Podcast, Podcast Addict, or Spotify. For more research, visit the BNP Paribas Wealth Management website.

Thank you very much.

Gurminder Singh:

Thank you. Goodbye.