TOKYO \u2014 Japanese Prime Minister Sanae Takaichi\u2019s political fortunes are falling almost as fast as the yen these days \u2014 and the two are closely linked.<\/p>\n
The yen has slid toward 164<\/a> against the dollar, its weakest level since 1986, driven partly by the same economic strains dragging down Takaichi\u2019s approval ratings. A new Mainichi Shimbun poll shows her Cabinet\u2019s support dropping 10 points to 41% in mid-July, slipping below 50% for the first time.<\/p>\n But the yen\u2019s decline is troubling for three reasons that global markets have largely overlooked. First, it exposes how bereft the ruling Liberal Democratic Party is of fresh strategies for keeping pace with a faster-growing China. <\/p>\n A weak yen has been the LDP\u2019s default growth lever for 25 years. And Takaichi\u2019s slipping popularity is only compounding the problem as she pours political capital into an unpopular Imperial House Law that changes the rules governing both marriage and adoption within Japan\u2019s royal family, rather than focusing on economic concerns.<\/p>\n Second, there\u2019s a strange silence from Washington as the yen plumbs new modern lows. Given the scale of the current trade war \u2014 Trump has just layered new 10%-12.5% tariffs<\/a> onto most major trading partners \u2014 you\u2019d expect sharp criticism of Japan for manipulating its exchange rate. Instead, Treasury Secretary Scott Bessent\u2019s department has said almost nothing about the yen.<\/p>\n Third, the yen no longer seems to attract the safe-haven demand it once did during global turmoil. That could reflect broader dollar strength rather than yen weakness \u2014 gold isn\u2019t rallying either \u2014 but it may also confirm a fear long held in Tokyo: that global capital is simply routing around Japan.<\/p>\n For now, Tokyo\u2019s priority is propping up a slowing economy. Japan is projected to grow just 0.5% in 2026 \u2014 far below the inflation trajectory the Bank of Japan<\/a> has been signaling much of the year.<\/p>\n Since the BOJ raised rates to a 31-year high of 1% in mid-June, the Iran war has reemerged as a major risk, threatening to push oil-importing Japan into stagflation \u2014 a scenario that could prove even harder to manage than the deflation of past decades.<\/p>\n Despite public statements and periodic intervention, the reality is that Takaichi\u2019s government still wants a weaker yen \u2014 not necessarily a plunge to 170, but a retreat to the 140-150 range would increase pressure on Japan\u2019s US$4.2 trillion economy.<\/p>\n China\u2019s shadow looms large<\/a> here. Beijing has spent the past two years exporting industrial overcapacity worldwide, intensifying price competition that President Xi Jinping\u2019s government has struggled to rein in.<\/p>\n A stronger yen would blunt Japan\u2019s ability to compete on price in export markets \u2014 markets that are also getting a boost from the AI boom. SoftBank Group\u2019s market value has now surpassed Toyota\u2019s, and firms like Kioxia and Taiyo Yuden are gaining ground too.<\/p>\n Regardless of what Takaichi says publicly, she worries a firmer yen could slow that momentum, along with the broader rally that pushed the Nikkei 225 above 72,000<\/a> last month (it has since eased back to around 64,000<\/a>, after starting the year near 50,000).<\/p>\n Even so, officials are rhetorically outraged over the currency\u2019s slide without doing much to address its root cause. Finance Minister Satsuki Katayama continues to warn that \u201cdecisive action\u201d is available if the yen weakens excessively, and Tokyo did intervene briefly in April and May when the rate crossed 160.<\/p>\n But as Deutsche Bank strategist Mallika Sachdeva notes, without a credible plan to rein in Japan\u2019s soaring debt, these moves are largely symbolic: if fiscal capacity becomes the dominant policy concern, currency management could increasingly give way to yield management, and how the government handles that trade-off will shape the yen\u2019s trajectory going forward.<\/p>\n That\u2019s why past interventions haven\u2019t stuck this time \u2014 traders have watched this pattern repeat too often to expect a different outcome.<\/p>\n Tokyo does have levers left to pull, even if using them would be risky. One path involves persuading Bessent\u2019s Treasury<\/a> to join a sustained, coordinated intervention.<\/p>\n The more radical option would be resurrecting the reflationary strategy of Korekiyo Takahashi \u2014 the finance minister often called \u201cJapan\u2019s Keynes\u201d \u2014 who combined aggressive monetary easing with fiscal expansion, including direct central bank purchases of government debt, to pull Japan out of the Great Depression in the 1930s.<\/p>\n Former Federal Reserve Chair Ben Bernanke has praised<\/a> the approach, and many economists consider it an early precursor to Modern Monetary Theory. Takaichi\u2019s mentor, Shinzo Abe, was drawn to Takahashi\u2019s example during his 2012-2020 premiership, pushing the BOJ toward supersized quantitative easing starting in 2013.<\/p>\n By 2018, the BOJ\u2019s balance sheet had grown larger than Japan\u2019s entire economy \u2014 a first among G7 nations. Yet even Abe stopped short of going all-in on Takahashi-style debt monetization.<\/p>\n Trying that now, in 2026, could easily backfire<\/a>. Twenty-seven years of near-zero rates and a weak yen never revived Japan\u2019s underlying growth engine \u2014 if anything, they dulled the urgency for structural reform.<\/p>\n While Japan stood still, China reshaped global manufacturing much as Japan itself did in the 1980s, and Japanese industry still hasn\u2019t found an answer to competitors like electric-vehicle giant BYD or AI success DeepSeek<\/a>.<\/p>\n All of this leaves the BOJ facing a precarious stretch as it tries to keep normalizing rates. Moody\u2019s Analytics economist Sarah Tan points out that the inflation outlook now hinges largely on developments in the Middle East and their effect on commodity prices.<\/p>\n Tan says if nominal wages fail to keep pace, real incomes and consumer spending could suffer, with any further yen depreciation only adding to imported inflation.<\/p>\n Takaichi\u2019s team appears to be drawing the wrong lessons from two eras of quantitative easing \u2014 the 2000s version and Takahashi\u2019s original 1930s model.<\/p>\n Modern QE traces back to 2001, when then-BOJ Governor Masaru Hayami used it to combat deflation and contain a bad-loan crisis left over from the 1990s. The approach later spread to the US, UK, eurozone and Australia following the 2008 global financial crisis.<\/p>\n But while those central banks eventually normalized policy, Japan never fully weaned itself off monetary support<\/a>. Despite years of tightening, the BOJ still holds more than half of all outstanding Japanese government bonds and remains the country\u2019s largest equity holder.<\/p>\n Current Governor Kazuo Ueda has pushed further toward exiting zero rates this year than his predecessor Toshihiko Fukui managed between 2003 and 2008, when rates ultimately drifted back to zero, and QE returned by 2009.<\/p>\n Ueda\u2019s team is expected to leave rates unchanged on July 31. Longer term, though, he\u2019s determined not to repeat that cycle. Ueda\u2019s biggest obstacle may be the LDP itself, which has relied on essentially one economic playbook \u2014 stimulus \u2014 for seven decades of near-continuous rule since 1955.<\/p>\n Even senior party figures now privately acknowledge that a quarter-century of zero rates backfired, with the yen\u2019s prolonged slide as the price now coming due.<\/p>\n Takaichi, though, shows little sign of breaking from that tradition. Her economic approach so far looks nearly indistinguishable from Abe\u2019s \u2014 and, by extension, from the Takahashi model that inspired him.<\/p>\n Tension flared briefly this month when Takaichi\u2019s government suggested the Government Pension Investment Fund \u2014 the world\u2019s largest pension fund \u2014 might repatriate large sums of overseas capital, a move that would have strengthened the yen.<\/p>\n Tokyo has since walked that back, fueling concern that officials will instead lean on the BOJ to resume bond purchases \u2014 a step Deutsche Bank\u2019s Sachdeva warns \u201ccould be very negative\u201d if it looks like the central bank is being co-opted to prop up the bond market<\/a>.<\/p>\n This is the crux of the standoff. Ueda entered 2026 looking like the governor who had finally steered Japan out of deflation, having raised the benchmark rate to a 30-year high of 0.75% in December and to 1% last month.<\/p>\n But the Iran war, which erupted February 28, scrambled those plans \u2014 driving up oil prices and tariff pressures just as the government pushes back against further tightening.<\/p>\n Takaichi has openly called additional rate hikes \u201cstupid,\u201d and in March lawmakers questioned her directly about whether she was pressuring the BOJ.<\/p>\n While nominally independent, the BOJ faces far more political pressure than peers like the Fed or European Central Bank \u2014 making Takaichi\u2019s resistance to inflation-fighting especially striking just as Iran-driven price shocks threaten to destabilize the region\u2019s economy.<\/p>\n One wild card here is that as China\u2019s growth slows, President Xi may well turn to a weaker yuan to boost exports, happily taking political cover in Tokyo\u2019s own devaluation efforts. That would most certainly catch Bessent\u2019s attention in Washington.<\/p>\n Another is that bond markets get antsy. As Robin Brooks, economist at the Brookings Institution, notes, Takaichi has been angling to end excessive fiscal austerity<\/a>.<\/p>\n \u201cThat\u2019s highly irresponsible,\u201d he says, warning that Tokyo could be \u201cin the early stages of a global debt crisis<\/a>. Long-term government bond yields have risen sharply everywhere. Markets are losing patience with governments that are chronically unable or unwilling to bring public debt down. This is no time to pretend Japan\u2019s humongous debt isn\u2019t a problem. Denial isn\u2019t a plan.\u201d<\/p>\n