U.S. Treasury Urges Bank of Japan to Tighten Policy Amid Yen Weakness and Trade Imbalances
U.S.
The U.S. Treasury Department has called on the Bank of Japan (BOJ) to continue monetary tightening in an effort to normalize the persistent weakness of the yen and help address bilateral trade imbalances. The recommendation, issued Thursday in the Treasury’s semiannual exchange-rate report to Congress, marks a rare and explicit policy suggestion from Washington regarding Japan’s domestic monetary strategy.
“BOJ policy tightening should continue to proceed in response to domestic economic fundamentals including growth and inflation, supporting a normalization of the yen’s weakness against the dollar and a much-needed structural rebalancing of bilateral trade,” the report stated.
The Treasury also emphasized that Japanese government investment vehicles—such as large public pension funds—should base foreign investment decisions on risk-adjusted return and diversification, rather than targeting exchange rate outcomes. “Government investment vehicles… should invest abroad for risk-adjusted return and diversification purposes, and not to target the exchange rate for competitive purposes,” it said.
This direct reference to Japan’s monetary strategy reflects rising concern in Washington over the prolonged depreciation of the yen, which many economists attribute in part to the BOJ’s ultra-loose monetary policy. The yen has remained under pressure against the dollar even after the BOJ ended its long-standing negative interest rate regime earlier this year.
Japanese Finance Minister Katsunobu Kato responded cautiously to the U.S. statement during a press briefing on Friday, reaffirming the independence of the central bank. “The government leaves monetary policy decisions to the BOJ,” Kato said. He declined to comment specifically on the Treasury report, and regarding pension funds, he stated it was “natural” for them to pursue their own management goals independently.
In its review of global exchange-rate practices, the U.S. Treasury did not label any major trading partner as a currency manipulator. However, it maintained a monitoring list of economies subject to enhanced scrutiny, which includes Japan, China, South Korea, Taiwan, Singapore, Vietnam, Germany, Ireland, and Switzerland. These countries met one or more of the criteria for potential currency manipulation, such as large current account surpluses or significant foreign exchange interventions.
The BOJ officially ended its decades-long program of massive monetary stimulus in March 2024, raising its short-term policy rate to 0.5% after determining that inflation was likely to remain near its 2% target. However, since then, further tightening has proceeded cautiously. Despite signaling readiness to raise rates again, the BOJ revised down its economic growth forecast in May, citing the adverse effects of higher U.S. tariffs and a slowing global economy.
Market participants have attributed the yen’s sustained weakness in part to the BOJ’s slow normalization of interest rates relative to the Federal Reserve. While the Fed has held its benchmark rate above 5%, Japan’s policy rate remains far lower, leading to capital outflows and downward pressure on the yen.
A Reuters poll conducted between May 7 and May 13 found that most economists expect the BOJ to keep rates unchanged through September. A narrow majority anticipated a rate hike before the end of the year. The slow pace of normalization continues to weigh on investor sentiment, particularly amid volatile currency movements and trade tensions.
The yen traded at 144.75 per dollar earlier this week, holding firm but still reflecting long-term depreciation. The BOJ now faces growing international pressure to act more decisively, while balancing domestic economic fragility and global policy expectations.