Nomura: If the yen continues to weaken, the Bank of Japan may raise interest rates three times in a row.

The continued weakening of the yen is prompting markets to reassess the Bank of Japan's interest rate path. Nomura Securities warns that in an extreme scenario, the Bank of Japan could raise interest rates in three consecutive meetings, which would be the bank's most aggressive monetary policy tightening pace in decades.

In an interview with Bloomberg TV, Yujiro Goto, head of Japanese foreign exchange strategy at Nomura Securities, said a 25-basis-point rate hike in September "looks reasonable," and that consecutive rate hikes in October and December "are possible" if the yen's weakness continues towards 160. This statement marks a significant shift in market expectations for the Bank of Japan—which had previously been proceeding with policy normalization at a cautious pace.

The yen has risen more than 2% this week, reaching around 156 yen to the US dollar, driven by rising expectations of accelerated tightening by the Bank of Japan and market speculation that the Government Pension Investment Fund (GPIF) may adjust its asset allocation. The overnight index swap market has fully priced in a 25 basis point rate hike in September and a further rate hike before January next year.

Extreme Scenario: The Specific Path of Three Consecutive Interest Rate Hikes

The core trigger for Goto's scenario of a three-year interest rate hike is a continued depreciation of the yen, approaching the 160 level. He points out that if this momentum continues, there is a realistic possibility that the Bank of Japan will take consecutive actions in September, October, and December.

It is worth noting that three consecutive interest rate hikes would be an extremely rare and aggressive move for the Bank of Japan. This central bank has been battling deflation for most of the past three decades, keeping borrowing costs near zero, and such rapid tightening is virtually unprecedented in history.

Goto's own baseline forecast is relatively dovish: he expects the Bank of Japan to raise interest rates at least once per quarter thereafter and to maintain its target of 154 yen to the dollar.

Government stance becomes a key variable

Goto emphasizes that the Japanese government's stance on monetary policy will be a key factor in determining whether the yen can continue to strengthen. Investors are closely watching signals from Prime Minister Sanae Takaichi—who previously expressed reservations about raising interest rates, and the market is awaiting whether she will shift her stance to support further tightening by the Bank of Japan.

"If she still sounds negative about the Bank of Japan's rate hikes, the market will be disappointed, and the yen could be sold off again," Goto said. Conversely, if Sanae Takashi chooses not to comment on monetary policy or emphasizes the Bank of Japan's independence, he believes the yen has room to rise above 150.

The Fed's actions may provide additional catalysts.

Goto also pointed out that the Federal Reserve's policy direction could be another important variable. Recent statements from Fed officials suggest that US policymakers may not be in a hurry to raise interest rates in September. If the Fed holds rates steady, while the Bank of Japan releases hawkish signals at the same time, a weaker dollar coupled with a stronger yen could cause the dollar/yen exchange rate to fall below 155 sooner than the market expects.

Bank of Japan Governor Kazuo Ueda has hinted at possible action at the upcoming meeting, while Hajime Takata, one of the bank's most hawkish board members, has also left room for unusually large and continuous rate hikes, further strengthening market expectations for an accelerated rate hike path.

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