Yen’s weakness prompts possible interest rate hikes up to three times this year, says Citigroup

The Bank of Japan could move to raise interest rates up to three times this year if the yen’s recent weakness persists, Citigroup’s head of markets for Japan, Akira Hoshino, has warned, underscoring how currency moves are now central to expectations for Tokyo’s policy course. According to The Japan Times, Hoshino said the BOJ might lift the overnight call rate by a quarter-point to 1% in April if the dollar climbs above ¥160, with a further rise possible in July and a third hike by year-end should the yen remain low.

“Put simply, the yen’s weakness is being driven by negative real interest rates,” Hoshino said in an interview, referring to a situation in which yields remain below inflation. The BOJ, he added, “has no choice other than to address this” if it wants to reverse the exchange rate’s direction, remarks that signal currency levels are feeding directly into policy deliberations as consumer frustration with rising prices grows.

Market pricing already reflects an increased probability of tightening. Economists surveyed by Bloomberg expect roughly one hike every six months, with many pencilling in July for the next move, while swaps markets imply traders are pricing a first increase by July and see about a 90% chance of another by December, according to The Japan Times.

The yen has been trading weakly but volatile. Tokyo trading saw the currency at about 158.2 to the dollar on Tuesday morning, after an 18-month low of 159.45 last week, The Japan Times reported. Citigroup expects the yen to trade in a range a little below 150 to 165 per dollar through the year if current dynamics persist.

Beyond immediate market mechanics, analysts and bank strategists point to broader implications. According to AInvest, a weaker yen has already helped push Japan’s 10-year government bond yield to around 2.32%, the highest in decades, as investors price higher inflation expectations. That rise in yields, together with surging import costs and political uncertainties , including the possibility of a snap election , complicates the BOJ’s policy calculus, the report said.

Hoshino also flagged a potential flow of assets back to Japan should domestic yields begin to outpace inflation, saying Japanese institutions might repatriate investments into fixed-income products if key rates, such as 10-year yields, start to exceed inflation. “Even if investors want to bring money back to Japan, there haven’t been many products to invest that in,” he told The Japan Times, arguing that the scarcity of suitable yen-denominated instruments has helped sustain the weak currency.

Citigroup’s markets division, which generated roughly a quarter of New York-based Citigroup’s revenue last year, has been positioning to benefit from any repatriation and from the heightened dealmaking environment in Japan. Hoshino said he has prioritised closer coordination between his markets team and the investment banking arm so traders and bankers can better match supply and demand at earlier stages of transactions, enabling more effective financing solutions for clients.

The commentary from Citigroup aligns with other international coverage underlining the growing link between exchange-rate moves and Japan’s inflation outlook. According to The Economic Times, that linkage is prompting BOJ officials to pay closer attention to the yen’s impact on prices, a shift from the long period when the central bank’s primary focus was on lifting inflation from persistently low levels. Industry reports suggest the BOJ may also revise up its economic and inflation forecasts in forthcoming outlooks, a signal markets will watch closely for signs the era of ultra-easy policy is finally shifting.