With the yen hitting a fresh multi-decade low against the dollar this week, the Ministry of Finance is signaling a growing likelihood of intervention in the foreign exchange markets. However, the Bank of Japan has ruled out directly responding to a weaker exchange rate with interest rate hikes as policymakers are worried that rising import costs could undermine the nascent virtuous cycle between prices and wages. Nonetheless, the Board seems to be getting more confident in the outlook for inflation, which poses risks to our forecast that the Bank won't hike interest rates any further.
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