Fed hike could push yen to 165 per dollar, ex-BOJ policymaker says

* Ex-BOJ policymaker Shirai: dollar/yen may move to 163-165

* Shirai: Yen weakness could come if Fed raises rates this year

* Shirai on BOJ: 'markets expect another rate hike to 1.5% next year'

By Ankika Biswas

BENGALURU, June 23 - The Japanese yen could weaken to 165 per dollar if the Federal Reserve raises interest rates this year, former Bank of Japan policymaker Sayuri Shirai said on Tuesday, as wide U.S.-Japan rate differentials and doubts about Tokyo's appetite for intervention maintain pressure on the currency. "The dollar/yen rate may gradually move toward 163-165," Shirai, now a professor at Keio University, told the Reuters Global Markets Forum. "It appears very challenging to change the trend right now ... since the Ministry of Finance and BOJ already allowed the rate to move (to) above 160 since early June." The yen hit a two-year low of 161.92 against the dollar on Monday and was last trading at 161.45. At 165, the yen would be at its weakest level since 1986. Meanwhile, the latest data showed speculative net yen short positions hit a July 2024 high at 150,132 contracts. The yen's reaction to the Bank of Japan's latest quarter-point rate hike to 1%, its highest level since 1995, and the record intervention has been limited. Japan's policy rate remains well below the Fed's 3.50% to 3.75% range, leaving rate differentials firmly against the currency. The Fed's hawkish hold under new Chair Kevin Warsh has revived U.S. rate-hike bets, even as the U.S.-Iran deal pushed oil prices lower and eased global concerns about inflation. Traders are largely pricing in around two quarter-point Fed hikes by the end of the year, with a 75% chance of a hike by September. Some investment banks like BofA Global Research and Deutsche Bank abandoned prior forecasts for steady policy and now expect the Fed to raise rates within the year. Shirai expects the BOJ to raise rates by a quarter point in October or December, noting that the recent pullback in oil prices has not really supported the yen.

"Markets expect another rate hike to 1.5% next year," she said. "This is the maximum BOJ could do, I think."

Conversely, Jesper Koll, global ambassador for Monex Group Japan, predicted Japan's terminal rate will be around 3% by early 2028. "Based on a simple Taylor Rule, Japan's potential growth is 1%, inflation target is 2%; therefore, neutral policy rate should be around 3%," he said.

"The relentless weakness of the yen clearly demonstrates retail and professional investors think BOJ is behind the curve." To arrest the yen's slide, Tokyo has spent a record 11.7 trillion yen ($72.44 billion) intervening in the foreign exchange market between late April and early May. Shirai said it is unclear whether the finance ministry could intervene again, noting that U.S. Treasury Secretary Scott Bessent had signaled the BOJ needed to raise rates to contain the yen's depreciation. "Since the foreign exchange intervention accompanies U.S. Treasury securities selling, Bessent does not want to have any impact on U.S. Treasury yields," she said. Fiscal concerns have also pressured Japanese assets. Japan is moving toward temporarily cutting a consumption tax on food to 1% from 8% without a clear signal on funding measures. Prime Minister Sanae Takaichi's spending plans have kept investors wary, while BOJ rate-hike bets, inflation risks and fiscal concerns have kept Japanese government bond yields elevated.

"We wonder how she (Takaichi) will do expansionary fiscal policy without issuing JGBs," Shirai said. "Markets expect the 10-year (Japanese government bond) yield will move up to 3% or higher. This will really affect MOF interest payments."

The benchmark 10-year JGB yield was last at 2.660%.

(Join GMF on LSEG Messenger for live interviews: https://lseg.group/4oClBxC) (Reporting by Ankika Biswas in Bengaluru; Editing by Divya Chowdhury and Thomas Derpinghaus)