Japan’s fake fury over its free-falling yen

TOKYO — Japanese Prime Minister Sanae Takaichi’s political fortunes are falling almost as fast as the yen these days — and the two are closely linked.

The yen has slid toward 164 against the dollar, its weakest level since 1986, driven partly by the same economic strains dragging down Takaichi’s approval ratings. A new Mainichi Shimbun poll shows her Cabinet’s support dropping 10 points to 41% in mid-July, slipping below 50% for the first time.

But the yen’s 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.

A weak yen has been the LDP’s default growth lever for 25 years. And Takaichi’s 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’s royal family, rather than focusing on economic concerns.

Second, there’s a strange silence from Washington as the yen plumbs new modern lows. Given the scale of the current trade war — Trump has just layered new 10%-12.5% tariffs onto most major trading partners — you’d expect sharp criticism of Japan for manipulating its exchange rate. Instead, Treasury Secretary Scott Bessent’s department has said almost nothing about the yen.

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 — gold isn’t rallying either — but it may also confirm a fear long held in Tokyo: that global capital is simply routing around Japan.

For now, Tokyo’s priority is propping up a slowing economy. Japan is projected to grow just 0.5% in 2026 — far below the inflation trajectory the Bank of Japan has been signaling much of the year.

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 — a scenario that could prove even harder to manage than the deflation of past decades.

Despite public statements and periodic intervention, the reality is that Takaichi’s government still wants a weaker yen — not necessarily a plunge to 170, but a retreat to the 140-150 range would increase pressure on Japan’s US$4.2 trillion economy.

China’s shadow looms large here. Beijing has spent the past two years exporting industrial overcapacity worldwide, intensifying price competition that President Xi Jinping’s government has struggled to rein in.

A stronger yen would blunt Japan’s ability to compete on price in export markets — markets that are also getting a boost from the AI boom. SoftBank Group’s market value has now surpassed Toyota’s, and firms like Kioxia and Taiyo Yuden are gaining ground too.

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 last month (it has since eased back to around 64,000, after starting the year near 50,000).

Even so, officials are rhetorically outraged over the currency’s slide without doing much to address its root cause. Finance Minister Satsuki Katayama continues to warn that “decisive action” is available if the yen weakens excessively, and Tokyo did intervene briefly in April and May when the rate crossed 160.

But as Deutsche Bank strategist Mallika Sachdeva notes, without a credible plan to rein in Japan’s 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’s trajectory going forward.

That’s why past interventions haven’t stuck this time — traders have watched this pattern repeat too often to expect a different outcome.

Tokyo does have levers left to pull, even if using them would be risky. One path involves persuading Bessent’s Treasury to join a sustained, coordinated intervention.

The more radical option would be resurrecting the reflationary strategy of Korekiyo Takahashi — the finance minister often called “Japan’s Keynes” — 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.

Former Federal Reserve Chair Ben Bernanke has praised the approach, and many economists consider it an early precursor to Modern Monetary Theory. Takaichi’s mentor, Shinzo Abe, was drawn to Takahashi’s example during his 2012-2020 premiership, pushing the BOJ toward supersized quantitative easing starting in 2013.

By 2018, the BOJ’s balance sheet had grown larger than Japan’s entire economy — a first among G7 nations. Yet even Abe stopped short of going all-in on Takahashi-style debt monetization.

Trying that now, in 2026, could easily backfire. Twenty-seven years of near-zero rates and a weak yen never revived Japan’s underlying growth engine — if anything, they dulled the urgency for structural reform.

While Japan stood still, China reshaped global manufacturing much as Japan itself did in the 1980s, and Japanese industry still hasn’t found an answer to competitors like electric-vehicle giant BYD or AI success DeepSeek.

All of this leaves the BOJ facing a precarious stretch as it tries to keep normalizing rates. Moody’s 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.

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.

Takaichi’s team appears to be drawing the wrong lessons from two eras of quantitative easing — the 2000s version and Takahashi’s original 1930s model.

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.

But while those central banks eventually normalized policy, Japan never fully weaned itself off monetary support. Despite years of tightening, the BOJ still holds more than half of all outstanding Japanese government bonds and remains the country’s largest equity holder.

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.

Ueda’s team is expected to leave rates unchanged on July 31. Longer term, though, he’s determined not to repeat that cycle. Ueda’s biggest obstacle may be the LDP itself, which has relied on essentially one economic playbook — stimulus — for seven decades of near-continuous rule since 1955.

Even senior party figures now privately acknowledge that a quarter-century of zero rates backfired, with the yen’s prolonged slide as the price now coming due.

Takaichi, though, shows little sign of breaking from that tradition. Her economic approach so far looks nearly indistinguishable from Abe’s — and, by extension, from the Takahashi model that inspired him.

Tension flared briefly this month when Takaichi’s government suggested the Government Pension Investment Fund — the world’s largest pension fund — might repatriate large sums of overseas capital, a move that would have strengthened the yen.

Tokyo has since walked that back, fueling concern that officials will instead lean on the BOJ to resume bond purchases — a step Deutsche Bank’s Sachdeva warns “could be very negative” if it looks like the central bank is being co-opted to prop up the bond market.

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.

But the Iran war, which erupted February 28, scrambled those plans — driving up oil prices and tariff pressures just as the government pushes back against further tightening.

Takaichi has openly called additional rate hikes “stupid,” and in March lawmakers questioned her directly about whether she was pressuring the BOJ.

While nominally independent, the BOJ faces far more political pressure than peers like the Fed or European Central Bank — making Takaichi’s resistance to inflation-fighting especially striking just as Iran-driven price shocks threaten to destabilize the region’s economy.

One wild card here is that as China’s growth slows, President Xi may well turn to a weaker yuan to boost exports, happily taking political cover in Tokyo’s own devaluation efforts. That would most certainly catch Bessent’s attention in Washington.

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.

“That’s highly irresponsible,” he says, warning that Tokyo could be “in the early stages of a global debt crisis. 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’s humongous debt isn’t a problem. Denial isn’t a plan.”

Hence fears of a “Liz Truss moment” in Tokyo. In late 2022, then-UK Prime Minister Truss destabilized the debt market by attempting to sneak an unfunded tax cut past bond traders, leading to her unceremonious demise.

The extreme market turmoil remains a cautionary tale for Takaichi as her party mulls tax cuts. With a debt-to-GDP of 260% and the population shrinking fast, Takaichi needs to tread carefully.

Ultimately, though, the reason why the yen isn’t responding to Tokyo’s half-hearted efforts to feign displeasure with its weakness comes down to Charlie Brown, Lucy and the football. Each time, of course, Lucy pulls the football away from Charlie, and he ends up in the muck.

This isn’t global investors’ first brush with things-are-different-this-time chatter surrounding Asia’s second-biggest economy. That means anyone betting on a yen rally might regret it come year-end, as a duped and muddied Charlie Brown reminds us.

Follow William Pesek on X at @WilliamPesek