The persistent weakness of the yen is prompting a significant reassessment of the Bank of Japan's monetary policy trajectory. Strategists at Nomura have issued a stark warning, suggesting that under an extreme scenario, the central bank could implement rate hikes at three consecutive policy meetings, which would represent the most aggressive tightening cycle in decades for the institution.

Yujiro Goto, Nomura's chief Japan FX strategist, indicated in a Bloomberg Television interview that a 25-basis-point hike in September "appears reasonable." He further noted that if the yen's depreciation trend continues toward the 160 level, the possibility of additional moves in both October and December "cannot be ruled out." This assessment marks a notable shift in market expectations for a central bank that has historically pursued policy normalization with considerable caution.

The yen has strengthened by more than 2% this week, trading near the 156 level against the US dollar. This appreciation comes amid growing speculation about accelerated BOJ tightening and potential asset allocation adjustments by Japan's Government Pension Investment Fund. Rate markets have now fully priced in a quarter-point increase in September, with a subsequent move completely factored in by January next year.

The Path to Three Consecutive Hikes

The trigger point for the three-hike scenario outlined by Goto hinges on sustained yen weakness approaching the 160 threshold. He pointed out that if this momentum persists, the central bank taking action in September, October, and December becomes a realistic possibility. Such a sequence would be exceptionally aggressive for the BOJ, which has spent most of the past three decades battling deflation while keeping borrowing costs near zero. A rapid tightening of this magnitude has virtually no historical precedent for the institution.

Goto's own baseline forecast remains comparatively moderate. He expects the BOJ to raise rates at least once per quarter going forward and maintains his target of 154 yen per dollar.

Government Stance as a Crucial Factor

According to Goto, the Japanese government's attitude toward monetary policy will be instrumental in determining whether the yen's recent strength can be sustained. Investors are closely monitoring signals from Prime Minister Takashi Takaichi, who has previously expressed reservations about rate hikes. The market is awaiting indications of whether she will endorse further BOJ tightening.

"If she still sounds negative about BOJ rate hikes, the market will be disappointed and the yen could be sold again," Goto stated. Conversely, if Takaichi refrains from commenting on monetary policy or emphasizes the central bank's independence, he believes the yen has room to strengthen beyond the 150 level.

Fed Policy as an Additional Catalyst

Goto also highlighted Federal Reserve policy direction as another significant variable. Recent comments from Fed officials suggest US policymakers may not be in a hurry to ease in September. Should the Fed hold steady while the BOJ simultaneously signals a hawkish stance, a weaker dollar combined with a stronger yen could push the dollar-yen pair below 155 sooner than markets currently anticipate.

BOJ Governor Kazuo Ueda has already hinted at potential action at the upcoming meeting. Furthermore, Hajime Takata, one of the central bank's most hawkish board members, has left the door open for both larger-than-typical rate increases and consecutive hikes, further reinforcing expectations of an accelerated tightening path.