The significant depreciation of the Japanese yen (JPY) against the U.S. dollar (USD), as well as the substantial appreciation of the USD against other currencies, have emerged as major issues in today's financial markets. Earlier, we witnessed the astonishing surge in the Japanese stock market and the sharp decline of the JPY against the USD. Due to past forecasts of a strong USD, alternative analyses will not be discussed here. However, with the JPY breaking through 154, there is renewed interest in conducting further analysis. The conclusion is straightforward: the Bank of Japan (BoI) must consider raising interest rates.

In recent years, the BoJ has injected a significant amount of liquidity, starting with quantitative easing. Unlike other countries that implemented one or two rounds of it, Japan has continued with quantitative easing, releasing a substantial amount of liquidity in an astonishing scale. Typically, when money is printed excessively, its value diminishes, hence the depreciation of the JPY. This has attracted considerable capital to short the Japanese currency, exacerbating its depreciation.

Is there a way to slow down the depreciation of the JPY? The only option is to raise interest rates. Raising interest rates by the BoJ should not be based on the usual objectives of targeting the economy or price levels; rather, the focus should be on slowing down the depreciation of the currency, aiming to encourage holding the JPY rather than selling it.

Furthermore, looking at the stock market, the Japanese economy is actually performing very well, bordering on overheating, which also warrants consideration of raising interest rates. Therefore, considering all factors, it appears that the only path for the BoJ at present is to raise interest rates and refrain from intervening in the foreign exchange market, as that would not be a sustainable monetary policy operation.