US Treasury says BOJ should continue to tighten policy

The Bank of Japan should continue to proceed with monetary tightening, which would support a "normalization of the yen's weakness" and rebalancing of bilateral trade, the U.S. Treasury Department said on Thursday.

"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 Treasury said in its exchange-rate report to Congress.

"Treasury also stresses that government investment vehicles, such as large public pension funds, should invest abroad for risk-adjusted return and diversification purposes, and not to target the exchange rate for competitive purposes," the report said on Japan.

The rare, explicit mention of Japan's monetary policy turns Washington's focus to the BOJ's ultra-low interest rate, which is seen as among factors that have kept the yen weak against the dollar.

Asked about the report, Japanese Finance Minister Katsunobu Kato said on Friday that the government leaves monetary policy decisions to the BOJ.

"Based on this, we would like to refrain from making comments (on what was pointed out in the report)," he said, speaking in a regular news conference.

With regards to the report's reference on pension funds, Kato said it was natural for pension funds to pursue their own purposes in fund management.

The Treasury said no major U.S. trading partner was found manipulating its currency in 2024. But it said Japan, as well as China, South Korea, Taiwan, Singapore, Vietnam, Germany, Ireland and Switzerland, were on its monitoring list for extra foreign exchange scrutiny.

The BOJ ended its massive monetary stimulus last year and in January raised short-term interest rates to 0.5% on the view Japan was on the cusp of durably hitting its 2% inflation target.

While the central bank has signaled a readiness to raise rates further, the economic repercussions from higher U.S. tariffs forced it to cut its growth forecasts in May.

The slow pace at which the BOJ is raising interest rates has been seen by markets as a key factor keeping the yen weak against other currencies.

A Reuters poll, taken on May 7-13, showed most economists expect the BOJ to hold rates steady through September with a small majority forecasting a hike by year-end.