Yen at 158 level, long-term interest rates exceed 3%. Three changes to watch now

Even though the Bank of Japan raised interest rates, the yen is weakening instead of strengthening.

Moreover, Japan’s long-term interest rates have exceeded 3%.

The current financial market is becoming a bit difficult to understand if you only look at exchange rates, crude oil, or interest rates alone.

In fact, these are connected by a single thread:

crude oil → prices → interest rates → exchange rates

as follows.

Today, I will focus on three points that I am paying particular attention to as of September 25, 2026.

1. Interest rate hikes in both Japan and the US. Yet the yen is at the 158 level

First, the major factor is the global rise in interest rates.

On September 16, the US Federal Reserve raised its policy interest rate by 0.25% to 3.75-4.00%. The Fed cited the fact that inflation remains high.

In Japan, the Bank of Japan also raised its policy interest rate from 1.00% to 1.25% on September 18. This is the highest level in about 31 years.

Normally, one would want to think:

Japanese interest rates rise → the yen is bought

However, in reality, the yen fell to a level exceeding 158 yen to the dollar.

The background to this is that even if Japan raises interest rates, the interest rate gap with the US is still large, and there is also the market’s view on “how much further can the Bank of Japan raise interest rates in the future?”

In other words, a single interest rate hike has not been enough to change the trend of a weak yen.

However, personally, I am cautious about the recent remarks by Treasury Secretary Bessent.

On August 31, Mr. Bessent indicated his view that the Japanese government and the Bank of Japan would take measures leading to a “stronger yen.” When asked if this meant interest rate hikes, he replied to the effect that the market was already pricing that in, and the yen rose after this statement.

Subsequently, on September 8, the dollar-yen pair temporarily strengthened to 152.89 yen.

However, this yen appreciation was not caused solely by Mr. Bessent’s remarks. It is believed that multiple factors overlapped, including expectations of a Bank of Japan rate hike, the unwinding of yen-sell positions, hopes for the repatriation of overseas funds by Japanese investors, and pressure from the U.S. side to correct the weak yen.

And indeed, on September 18, the Bank of Japan decided to raise its policy interest rate to around 1.25%.

However, the yen subsequently weakened again, with the dollar-yen exchange rate exceeding the 158 level.

In other words, although the yen appreciated significantly at one point due to the Bank of Japan’s rate hike and the U.S. stance on correcting the weak yen, the current situation is that this alone has not been enough to completely reverse the trend of a weak yen.

It should be noted that the U.S. side is not only focused on the yen exchange rate. According to Reuters, Mr. Bessent has also been engaging with the Japanese side regarding Japan’s fiscal spending and monetary policy, and was reportedly concerned that selling of Japanese government bonds could spill over into the U.S. Treasury market.

This is something to keep in the back of your mind.

2. Japan’s 10-year bond yield surpasses 3%

Another point of concern is long-term interest rates.

On September 24, the yield on Japan’s 10-year government bond temporarily rose to 3.075%, reaching its highest level in about 30 years.

Long-term interest rates are also high in the U.S., with U.S. Treasury data showing the 30-year Treasury yield at 5.40% on September 23.

When long-term interest rates rise, it affects more than just those who hold government bonds.

The impact gradually spreads to mortgages, corporate borrowing rates, real estate, stock valuations, and even the government’s interest payment burden.

In fact, I also wrote an article about Japanese government bonds in July.

When I wrote the article in July, I was mainly looking at ultra-long-term government bonds, but since then, even 10-year government bonds have reached the 3% range.

I feel that the changes in the government bond market are spreading closer to our mortgages, corporate borrowing, and the country’s interest payment burden.

Personally, right now, rather than stock prices themselves, I am watching how high global long-term interest rates will go as a very important point.

3. The next turning point might be the ‘Strait of Hormuz’

And, while it may seem far removed from the financial markets, the Middle East is extremely important.

Currently, a proposal is being discussed between the U.S. and Iran to gradually proceed with the reopening of the Strait of Hormuz by Iran and the lifting of economic sanctions by the U.S.

However, no agreement has been reached at this time.

The reason this is important is that the Strait of Hormuz has a major impact on crude oil prices.

Crude oil prices are still hovering at levels exceeding $100 per barrel and are moving significantly based on progress in U.S.-Iran talks.

If passage through the Strait of Hormuz normalizes, it could lead to a sequence of:

lower crude oil prices
↓
reduced inflationary pressure
↓
less need for additional rate hikes
↓
lower long-term interest rates

which could lead to that outcome.

For Japan, it would further lead to:

cheaper crude oil → lower import prices → easing of upward pressure on prices

which will also affect the yen and the Bank of Japan’s monetary policy.

What will happen next?

My base scenario is not that interest rates will immediately return to the low-rate world of the past, but rather a world of “high interest rates while watching crude oil and inflation” for some time.

However, the situation in the Middle East has the potential to significantly change that premise.

Conversely, if U.S.-Iran talks break down and concerns about crude oil supply intensify again,

higher crude oil → inflation → rate hikes → rising interest rates

could potentially strengthen that trend even further.

That is why right now,

“what the Fed will do next”

is not the only thing; I believe that watching

“what happens to crude oil”

has become quite important for understanding the financial markets.

By the way, today, September 25th, the Bank of Japan is scheduled to release its “indicators for capturing underlying inflation” at 2:00 PM. This is also a point I want to check in order to understand Japanese prices and future monetary policy.

To summarize this article in one sentence

The current world is caught in a chain reaction of ‘rising crude oil prices → inflation → high interest rates → weak yen’.

And one of the next major turning points that could change that trend is likely to be the US-Iran negotiations surrounding the Strait of Hormuz.

*This article was compiled and written using AI based on publicly available information. In addition to AI-based fact-checking, the content has been verified against public institutions and primary sources as much as possible. However, as there is a possibility of errors or updated information, please be sure to check the latest official information when making important decisions.
*This article is intended for general information purposes and does not recommend the buying or selling of any specific financial products.