A narrowing interest rate gap between the US and Japan could lead to a strengthening of the yen against the dollar. The exchange rate could reach the 135–140 range by the end of the year, as projected by former Japanese diplomat Mitsuhiro Furusawa.
According to him, the US likely wants to avoid further dollar growth to support exports. Japan, in turn, seeks to prevent inflation from surging in response to the weakening yen. Thus, the two countries' goals are consistent with each other.
While the Federal Reserve plans to lower interest rates, the Bank of Japan is considering raising them. Kazuo Ueda, the head of the Japanese regulator, stated that he will continue to hike rates if economic and price growth indicators improve. At the same time, the official signaled a possible pause in changing monetary conditions until there is clarity regarding Trump's policy.
Furusawa believes that if Japan manages to reach a trade agreement with the US, this uncertainty will be resolved. Real wages will also grow and support consumption after food inflation declines, he says. Given these potential changes, the Bank of Japan may raise rates in the second half of this year.