International Monetary Fund First Deputy Managing Director Dan Katz recently stated that Japan’s economy is undergoing a “profound long-term transformation,” with structural reforms pushed during former Prime Minister Shinzo Abe’s tenure gradually showing results, providing ample room for the Bank of Japan to continue normalizing monetary policy. Against a backdrop where inflation remains slightly above the 2% target, he expects the BOJ to continue gradually exiting its nearly three-decade-long ultra-loose monetary policy.
In an interview in Cape Town, South Africa, Katz pointed out that Japan’s economic improvement in recent years is not a short-term phenomenon but a concrete manifestation of structural reforms entering a harvest period. He explicitly stated: “Japan’s economy is undergoing a very important long-term transformation. The Bank of Japan has already begun to exit the ultra-low interest rate era that lasted nearly three decades and is advancing policy normalization.”
Addressing the market’s intense focus on the rate hike path, Katz further explained that the BOJ will formulate policy according to its legal mandate, supporting economic growth while ensuring the inflation target is met. With Japan’s inflation currently still slightly above the BOJ’s 2% target level, he expects monetary policy normalization to continue. Katz emphasized: “Inflation is currently still slightly above target, so I expect the Bank of Japan will continue to advance policy normalization.”
U.S.-Japan Joint Yen Intervention Brightens Exchange Rate Outlook
Dramatic volatility in currency markets is also gripping policymakers’ attention. Just last week, the United States and Japan conducted their first joint yen intervention in fifteen years. U.S. Treasury Secretary Scott Bessent subsequently issued a stern warning to currency speculators, stating that Washington is prepared to take follow-up action if necessary.
Bessent publicly emphasized that the yen is currently significantly undervalued, and that the intervention is just one means of addressing this imbalance, with deeper economic and policy adjustments still needed to improve the exchange rate.
When discussing how to support the yen, Katz said the BOJ should continue taking measures consistent with its policy objectives, maintaining a balance between stabilizing prices and supporting the economy.
Bank of America, following the coordinated intervention, released an updated forecast predicting the yen will appreciate by about 6% by year-end. The bank’s analyst team noted that, supported by joint action from the U.S. and Japanese governments and expectations of a potential BOJ rate hike in the coming months, the dollar-yen exchange rate is expected to fall from the current level of around 158 to 149. The bank had previously forecast a year-end rate of 152.
Bank of America analysts wrote in their report: “The intervention raises the bar for successfully defending the yen, which may require macro policy follow-through, specifically accelerating rate hikes. Moving in September rather than waiting until October would provide the BOJ an opportunity to demonstrate its resolve to stay ahead of the curve in addressing upside inflation risks.”
As of Thursday evening Taipei time, the yen traded at 158.18 against the U.S. dollar, down about 1.3% from its August 3 high.
Global Economy Shows Resilience; AI and Financial Innovation Become New Engines
Discussing the global economic outlook, Katz believes that despite ongoing geopolitical conflicts and persistent supply chain challenges, the global economy overall is demonstrating greater-than-expected resilience.
New technologies such as artificial intelligence are becoming important forces driving global economic growth. Katz specifically noted that large-scale investments centered around AI are continuously fueling global economic activity, serving as a core engine driving global growth.
Furthermore, fintech innovation is reshaping the landscape of emerging markets. Katz mentioned that a significant wave of financial innovation is currently sweeping the globe, with new technologies and business models constantly emerging, particularly in Africa, where innovations like mobile payments are creating more value for consumers and businesses.
IMF Warns of Global Imbalance Risks
Amid the optimistic outlook, Katz also raised warnings about deep-seated vulnerabilities in the global economy. He pointed out that, unlike in the past when countries frequently switched between trade surpluses and deficits, many nations now maintain massive surpluses or deficits for extended periods. This persistent global imbalance could trigger sharp adjustments in financial markets.
Katz analyzed that the frequency with which countries switch between trade surplus and deficit status is decreasing. If deficits and surpluses remain high and rigid over the long term, once a financial rupture occurs, markets could undergo a disorderly and violent reckoning.
Addressing this risk, Katz stated that the IMF will continue to provide policy advice to its member countries, helping them optimize domestic economic policies and international economic linkages to promote more balanced and sustainable global growth.
For Japan, awakening from the old era of monetary easing is not only an inevitable outcome of its domestic economic transformation but also a key link in the global economic rebalancing process. How the Bank of Japan balances supporting economic growth with controlling inflation, and advances rate hikes at the appropriate time, will continue to grip the nerves of global financial markets.