TOKYO — Earlier this month, central bankers around the globe rushed to Federal Reserve Chair Jerome Powell’s defense.
The burst of monetary solidarity was in response to news on Jan. 11 that Powell was under critical investigation. Ostensibly, it’s related to alleged cost overruns surrounding a Fed headquarters construction project. But, like Powell, investors everywhere know it’s really about US President Donald Trump’s desire for sharply lower interest rates.
Trump spent much of 2025 trying to bully Powell into pushing benchmark rates down to the 1% zone. Along with threatening to fire him, Trump has called Powell everything from “stupid” to a “numbskull” to a “stupid person” to a “stubborn mule.” Unprecedented stuff all around.
In a remarkable video earlier this month, Powell pushed back, dismissing the “pretext” that the Justice Department had a legitimate reason to come after him. “The threat of criminal charges,” Powell said, “is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the president.”
This ploy to control the Fed isn’t sitting well with peers. The same week the subpoenas were flying, the heads of the European Central Bank, Bank of England, Bank of Canada, Bank of Korea and other monetary authorities came to Powell’s defense.
In a joint statement, top central bankers, including ECB President Christine Lagarde, said “we stand in full solidarity with” Powell and that the “independence of central banks is a cornerstone of price, financial and economic stability in the interest of the citizens that we serve.”
Former Bank of England official Jonathan Haskel told the New York Times that “it’s in nobody’s interests for there to be worries and instability in the US. Other countries hold lots of American assets.
Savers in Europe will implicitly be invested in the American stock market. America is in many ways a flagship engine, with the AI revolution going on. Nobody in the world wants to see that at risk.”
Unfortunately, it already is at risk. And it’s disheartening that the Bank of Japan chose to sit this one out. When asked why the BOJ is pretending the globe’s most powerful central bank isn’t under assault, Tokyo officials said, in one way or another, that “it’s not our style.”
What a grave mistake on the part of a top-three global central bank. Particularly in light of the intensifying pressure campaign in Tokyo to bring the BOJ to heel as Japanese growth slows.
The logic put forth by BOJ Governor Kazuo Ueda’s team is that the central bank’s reticence on any issue not directly related to Japan’s money supply protects it from political meddling. That’s especially so of topics outside Japanese borders.
Yet Trump’s assault on the Fed is the defining central bank risk of our time. Never before in the Fed’s 113-year history has a US leader gone after America’s most respected global institution with such intensity.
That’s despite the Fed’s key role in protecting the value of the reserve currency and US Treasury securities. The BOJ is making a grave mistake by staying on the sidelines.
“This logic is flawed,” Kumiharu Shigehara, a former chief BOJ economist, writes in a Japan Times op-ed. “Central bank independence doesn’t mean freedom from explanation. It means delegated discretion — the authority to make policy decisions insulated from day-to-day political pressure. That delegation is sustainable only if the institution explains how it uses its discretion, what assumptions underpin its decisions and where uncertainty lies.”
The BOJ could indeed be next in the line of political fire. Japan’s central bank has technically been independent since 1998. But it’s arguably never had the distance from political influence that the Fed had long enjoyed. Or that of the German Bundesbank of old — the institution after which the European Central Bank is modeled.
The BOJ cut rates to zero in 1999, where they’ve effectively been ever since. No truly autonomous central bank would ever hold rates near zero — or even negative — for 26-plus years while cornering the government bond market and becoming the biggest owner of Tokyo stocks.
In 2018, the BOJ’s balance sheet was so larded with bonds and stocks that it topped the size of Japan’s US$4.2 trillion. It was a first for a Group of Seven central bank and suggests that, as an institution, the BOJ remains “captured” by political forces.
Enter Prime Minister Sanae Takaichi, whose Liberal Democratic Party (LDP) is holding a snap election on Feb. 8. Since taking office on Oct. 21, Takaichi has made it clear her entire economic strategy is based on the BOJ holding rates ultralow and the yen remaining weak.
In early October, before she won the premiership, Takaichi rattled markets by saying that “the government must be responsible for fiscal and monetary policy. The BOJ will then consider the most appropriate means.”
Such views fly in the face of Ueda’s effort to normalize rates. In December, for example, the Ueda BOJ raised short-term rates to 0.75%, the highest since 1995. Yet the BOJ appears to be on hold indefinitely, partly because the political environment has turned firmly against raising rates.
There’s little indication that Team Takaichi would try to fire Ueda. But the BOJ drama instigated by Takaichi’s mentor Shinzo Abe in 2012 and 2013 is a cautionary tale.
At the time, Prime Minister Abe was fed up with then-BOJ Governor Masaaki Shirakawa’s “too cautious” approach toward rate cuts. Abe put the moves on the BOJ to provide “unlimited” monetary easing. While less acerbic than Trump, Abe’s BOJ jawboning left the Tokyo establishment aghast.
“I want respect for the BOJ’s independence as it’s doing its utmost to conduct appropriate monetary policy,” Shirakawa told reporters in late 2012.
In 2023, local Japanese media reported on documents detailing discussions from the Abe era. Turns out, the BOJ endured quite a struggle with the LDP to maintain its independence, as the LDP angled for lower rates.
At the time, the Asahi newspaper quoted then-Deputy BOJ Governor Hirohide Yamaguchi as saying Abe’s strategy “underlines the government’s firm intention to essentially delegate the implementation of monetary easing steps to the BOJ.”
Since Takaichi hails from the “Abenomics” wing of the LDP, it’s fair to worry that Ueda’s days of having latitude to make controversial rate decisions are numbered. In November, Takaichi’s economic plan stressed it’s “extremely important” for monetary policy to focus on achieving strong economic growth.
On November 9, 19 days into her premiership, Takaichi said: “I hope the BOJ guides appropriate monetary policy to stably and sustainably achieve 2% inflation driven not by cost-push factors, but wage increases.”
All this “is a huge threat for the BOJ as her remarks show she has little respect for central bank independence,” says former BOJ board member Takahide Kiuchi. “It’s quite likely she will interfere in monetary policy and try to keep rate hikes in check. I’m sure people at the BOJ are very alarmed.”
What’s more, Kiuchi warns, “the BOJ is not immune to the kind of things happening with the Fed. Although not as explicit as the way Trump intervenes, Takaichi has and could make a lot of requests (about) what the BOJ ought to do.”
The missing link, of course, is productivity growth. If Takaichi wants the BOJ to stop hiking rates – or perhaps even raise them – her team needs to act boldly to reduce bureaucracy, modernize labor markets, catalyze innovation and welcome greater disruption to increase worker efficiency.
One reason Japan’s 28th place productivity ranking among the 38 members of the Organization for Economic Cooperation and Development is that its population is aging and shrinking.
Another: Japanese inflation is already rising at a rate of 2.5% to 3%. As this year’s “shunto” round of union negotiations commences, Team Takaichi is gunning for a 5% pay gain.
Without an increase in productivity, wage gains of that magnitude would be inflationary. The BOJ, in turn, would likely feel compelled to continue hiking borrowing costs as inflation drifts further away from the 2% target.
This could put the BOJ and Takaichi on a collision course. At present, Japan is stumbling toward stagflation. The Ueda BOJ’s December rate hike came against the backdrop of a 2.3% year-on-year drop in the third quarter gross domestic product and government forecasts for 1.3% growth in the fiscal year beginning in April. That’s less than half the current rate of inflation.
This disconnect is hardly good news for investors pushing Nikkei 225 Stocks to record highs.
Economist Richard Katz notes that for the past decade, the BOJ has said that nominal wages need to rise 3% a year to produce 2% inflation driven by private domestic demand. However, as of November, nominal wages remain far below 3% and real wages keep falling in the face of inflation.
“That has suppressed the real consumer demand necessary for healthy inflation,” says Katz, author of The Contest for Japan’s Economic Future and the Japan Economy Watch newsletter.
All of this creates a real dilemma for the BOJ, Katz adds. Should it raise interest rates to fight its definition of core inflation — all items except fresh food and energy—which stood at 2.9% in December? Or, should it keep rates down to help stimulate consumer spending and business investment?
The real question is whether, in the Takaichi era, the BOJ will have sufficient autonomy to make its own decision. All the more reasons to put Tokyo on the record as Trump attempts a hostile Fed takeover.
Follow William Pesek on X at @WilliamPesek