Former Japan currency chief says FX intervention should be backed by rate hikes

Takehiko Nakao, Japan’s former vice finance minister for international affairs, urged the Japanese government and the Bank of Japan during a Reuters interview in Tokyo on February 6 to pair future foreign exchange interventions with steady interest rate hikes. Nakao, who previously served as the nation's top currency diplomat, argued that while selling foreign reserves can provide an immediate shock to the market to curb yen depreciation, such measures require the support of a tightening monetary policy to achieve long-term stability and effectiveness. The former official's comments come at a critical juncture for Japanese policymakers, who have faced persistent pressure as the yen struggles against a dominant US dollar. Nakao emphasized that relying solely on yen-buying interventions is insufficient because the underlying cause of currency weakness often stems from significant interest rate differentials between Japan and other major economies. By raising borrowing costs, the Bank of Japan could provide the fundamental economic justification needed to deter speculative trading and reinforce the impact of direct market entries. While Nakao acknowledged that the speed and timing of rate increases are delicate matters, he suggested that a clearer transition away from ultra-loose monetary policy would signal a more cohesive strategy to international investors. Historically, Japan has intervened in the markets to prevent excessive volatility, but these actions have often seen diminishing returns when the broader monetary environment remains unchanged. Nakao’s perspective reflects a growing sentiment among economic experts that Japan must modernize its toolkit to protect the national currency more effectively in an era of global inflation.