{"id":31223,"date":"2026-05-29T11:38:19","date_gmt":"2026-05-29T11:38:19","guid":{"rendered":"https:\/\/www.europesays.com\/japan\/31223\/"},"modified":"2026-05-29T11:38:19","modified_gmt":"2026-05-29T11:38:19","slug":"bank-of-japan-squeezed-by-takaichi-trump-and-iran-war-inflation","status":"publish","type":"post","link":"https:\/\/www.europesays.com\/japan\/31223\/","title":{"rendered":"Bank of Japan squeezed by Takaichi, Trump and Iran war inflation"},"content":{"rendered":"

Speaking on Wednesday (May 27), Bank of Japan Governor Kazuo Ueda cautioned that central banks must prevent this year\u2019s oil\u2011driven inflation surge from hardening into a lasting global problem<\/a>. <\/p>\n

\u201cIf inflation expectations are already high and wages are accelerating, the risk of second\u2011round effects is large,\u201d he said, adding that the line between temporary and persistent inflation \u201cis not mechanical.\u201d<\/p>\n

In other words, a June 16 BOJ rate hike isn\u2019t just likely \u2014 it could mark the start of a broader tightening cycle that finally puts Tokyo\u2019s normalization back on track. That shift would almost certainly push the yen higher, a development welcomed by US Treasury Secretary Scott Bessent and President Donald Trump.<\/p>\n

Prime Minister Sanae Takaichi would see it very differently, though. Before taking office last October, she laid out an economic strategy built on maintaining a weak yen \u2014 a stance that depends on the BOJ keeping rate hikes to a minimum. On the campaign trail, she even dismissed the idea of raising rates as \u201cstupid.\u201d<\/p>\n

So far in 2026, Team Ueda has stayed on the sidelines. When the BOJ lifted its benchmark rate to 0.75% in December \u2014 a 30\u2011year high \u2014 policymakers fully expected to follow it with more hikes. <\/p>\n

By now, Ueda was supposed to have secured his legacy as the governor who finally buried Japan\u2019s deflation\u2011era zero\u2011rate regime. If he\u2019s going to claim that legacy, he\u2019ll have to push past Takaichi<\/a> and the Liberal Democratic Party.<\/p>\n

For nearly three decades, the LDP has pressed the BOJ to cut rates \u2014 or at least avoid raising them \u2014 and largely gotten its way. Since 1999, when the BOJ became the first Group of Seven central bank to cut rates to zero, government after government has shamed policymakers into leaving them there. Or to go even further with quantitative easing (QE).<\/p>\n

The BOJ came closest to escaping zero rates and quantitative easing two decades ago under Governor Toshihiko Fukui, who served from 2003 to 2008. By 2006\u20132007, his team had unwound QE and lifted the benchmark rate to 0.5%<\/a>. But one mild recession \u2014 and then the \u201cLehman shock\u201d \u2014 sent the BOJ straight back to zero.<\/p>\n

When a new governor arrived in 2008, the first move was to restart QE. Japan\u2019s monetary ATM was back online. And in 2013, Governor Haruhiko Kuroda built an even bigger free\u2011money machine and cranked the settings to maximum.<\/p>\n

The decade before Ueda took over saw the BOJ dominate Japan\u2019s government\u2011bond market so completely that some issues didn\u2019t trade<\/a> at all on certain days. It also became the single largest owner of Tokyo stocks. By 2018, the BOJ\u2019s balance sheet<\/a> had ballooned past the size of Japan\u2019s $4.2 trillion economy \u2014 a first for any G7 nation.<\/p>\n

Ueda arguably waited too long to lift rates in 2023 and 2024, or to shift QE decisively toward QT, or quantitative tightening. By the time US President Donald Trump\u2019s trade war hit in 2025, the window for meaningful tightening had already narrowed.<\/p>\n

Then came Takaichi, a protege of former leader Shinzo Abe. She quickly revived his \u201cAbenomics\u201d playbook of aggressive easing and a weak yen, sharply limiting Ueda\u2019s room to push rates to 1% or higher.<\/p>\n

Yet it\u2019s also put Tokyo in Trump World\u2019s crosshairs a bit. When he was in Tokyo earlier this month, Bessent characterized the yen as undervalued and prodded the BOJ to press forward with rate hikes.<\/p>\n

\u201cI believe the fundamentals of the Japanese economy are strong and resilient, and that will be reflected in the exchange rate,\u201d Bessent said. He added that \u201cwe both believe that excess volatility is undesirable, and we have been in close contact with the Ministry of Finance, and we will stay in close contact with them,\u201d comments that suggest the US might be willing to engage in joint currency intervention.<\/p>\n

The strategy behind Bessent\u2019s moves<\/a> on Trump\u2019s behalf isn\u2019t hard to read. The White House has made little headway pressuring the US Federal Reserve to ease. Former Chair Jerome Powell resisted despite Trump\u2019s threats to fire him and prosecutors\u2019 attempts to constrain him.<\/p>\n

New Fed Chair Kevin Warsh is already boxed in by April\u2019s 3.8% year\u2011on\u2011year inflation<\/a> \u2014 the highest level in three years. If Trump and Bessent can\u2019t get the Fed to loosen policy, nudging the BOJ to tighten becomes the next\u2011best lever.<\/p>\n

If that\u2019s the plan, there\u2019s a case for the yen snapping higher once Iran\u2011war chaos fades and the Strait of Hormuz reopens. One reason: the BOJ looks poised to tighten ahead of the Fed. Another: traditional currency relationships have been breaking down.<\/p>\n

In earlier eras, any outbreak of conflict in the Middle East<\/a> would send the yen surging. Not in 2026. This year, the currency has instead flirted with the psychologically important 160 yen-per\u2011dollar level. The move has irritated Trump World, which is hypersensitive to any hint that Asia might be seeking a trade edge through artificially low exchange rates.<\/p>\n

That sets the stage for a potential clash between the BOJ and Takaichi\u2019s government. It may not be as loud or chaotic as Trump versus Powell, but things could get tense if Ueda chooses to do his job rather than defer to the government.<\/p>\n

Yes, the BOJ has been formally independent since 1998. But it slashed rates to zero soon after \u2014 and kept them there for more than 25 years. It also remains the financial stabilizer beneath both the government\u2011bond and stock markets. Now the QT process is at risk as Takaichi\u2019s team pushes for more BOJ support, not less.<\/p>\n

This tension could easily rattle global markets and put a hedge fund or two in the line of fire. It also carries unpredictable consequences for Japan\u2019s 125 million people and its corporate establishment. <\/p>\n

After decades of ultra\u2011easy money, banks, companies, pension funds, endowments, and a government saddled with the developed world\u2019s heaviest debt load are in for a shock if Ueda pulls away the punchbowl.<\/p>\n

In short, Ueda will have to shut out the noise \u2014 at home and abroad \u2014 and barrel ahead if he wants to get Japan Inc. clean and sober. Whether he has the resolve is something only Ueda knows.<\/p>\n

Japan\u2019s fixation with a weak yen is long overdue for retirement. A softer currency now risks backfiring badly: it could import even more inflation at a moment when prices are above the BOJ\u2019s 2% target. It could also provoke Team Trump and trigger even steeper tariffs<\/a>.<\/p>\n

But the bigger danger is that it fuels yet another round of complacency. Only now are many MOF officials and CEOs waking up to the damage done by 25 years of engineering a cheaper yen.<\/p>\n

Yes, a weak currency occasionally lifted GDP and padded corporate profits. But mostly it dulled the urgency for lawmakers to level the playing field and for executives to innovate, restructure, disrupt, and raise productivity.<\/p>\n

As the\u00a0International Monetary Fund points out, \u201cJapan\u2019s total factor productivity growth has been slowing for a decade and has fallen further behind\u00a0the\u00a0United States. A steady decline in allocative efficiency since\u00a0the\u00a0early 2000s has been a\u00a0drag on productivity<\/a>, and likely reflects an increase in market frictions.\u201d<\/p>\n

What\u2019s more,\u00a0the\u00a0IMF notes, \u201cJapan\u2019s ultra-low interest rates may have allowed low-productivity firms to survive longer than they otherwise would have, delaying necessary economic restructuring. Reforms aimed at improving labor mobility across firms would help improve Japan\u2019s allocative efficiency and boost productivity.\u201d<\/p>\n

Japan deserves better than another round of weak\u2011yen economics. Takaichi\u2019s revival of Abenomics is simply more of the same \u2014 and it\u2019s a big reason Japan is struggling in the Chinese era<\/a>.<\/p>\n

Since 2015, when President Xi Jinping launched \u201cMade in China<\/a>,\u201d Beijing poured vast resources into artificial intelligence, robotics, biotech, electric vehicles, renewable energy, semiconductors, and other frontier technologies.<\/p>\n

Japan, by contrast, spent the decade investing in mediocrity. With the MOF intervening in currency markets and the BOJ hoarding bonds and stocks, Tokyo made it easy for bureaucrats and CEOs to dodge reform. Where is Japan\u2019s DeepSeek\u2011style AI breakthrough? Its BYD\u2011like EV disruptor?<\/p>\n

Japanese\u00a0real wages\u00a0<\/a>just fell for the fourth straight year in fiscal 2025, which ended in March.\u00a0<\/p>\n

\u201cThe lack of real wage growth is the main drag,\u201d says Stefan Angrick, economist at Moody\u2019s Analytics. \u201cSlowing inflation and steady nominal pay gains were supposed to lift real incomes in 2026, but the prospect of a fresh jump in inflation pushes that scenario into the distance.\u201d<\/p>\n

Angrick adds that \u201cmodest fiscal support for households, defence and strategic investment should keep the economy from derailing, but the growing list of headwinds points to a difficult year.\u201d<\/p>\n

That could be made worse if Takaichi pushes on with her fiscal plans, sending Japanese government bond yields to multi-decade highs.\u00a0<\/p>\n

Robin\u00a0Brooks, economist at the Brookings Institution, notes that \u201cJapan has been in a slow-motion blow-up of exactly this kind for two years.\u201d He notes that \u201cthe bottom line is that\u00a0\u2018Liz Truss<\/a>\u2019\u00a0bond market selloffs are becoming more common across the G10 as debt levels rise and institutional integrity declines.\u201d<\/p>\n

In this sense, Bessent\u2019s Treasury Department should be careful about what it wishes for. As history shows, few events are more disruptive to global markets than sudden yen moves \u2013 in either direction.<\/p>\n

Follow William Pesek on X at @WilliamPesek<\/p>\n","protected":false},"excerpt":{"rendered":"Speaking on Wednesday (May 27), Bank of Japan Governor Kazuo Ueda cautioned that central banks must prevent this…\n","protected":false},"author":2,"featured_media":31224,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[1300,1871,448,8,14955,24118,2638,24119,33,8182,2640,10779,24120],"class_list":["post-31223","post","type-post","status-publish","format-standard","has-post-thumbnail","category-japan","tag-bank-of-japan","tag-block-2","tag-iran-war","tag-japan","tag-japan-interest-rates","tag-japan-qe","tag-kazuo-ueda","tag-kevin-warsh","tag-nihon","tag-sane-takaichi","tag-scott-bessent","tag-us-japan-relations","tag-yen-appreciation"],"_links":{"self":[{"href":"https:\/\/www.europesays.com\/japan\/wp-json\/wp\/v2\/posts\/31223","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/japan\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/japan\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/japan\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/japan\/wp-json\/wp\/v2\/comments?post=31223"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/japan\/wp-json\/wp\/v2\/posts\/31223\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/japan\/wp-json\/wp\/v2\/media\/31224"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/japan\/wp-json\/wp\/v2\/media?parent=31223"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/japan\/wp-json\/wp\/v2\/categories?post=31223"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/japan\/wp-json\/wp\/v2\/tags?post=31223"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}