After a 15-year hiatus, the US and Japan jointly intervened in currency markets in late July. This intervention temporarily supported the yen, but as anticipated, it failed to reverse its long-term weakness. The yen has now fallen back against the US dollar, hitting its lowest level since the July intervention. Market attention is now focused on whether another joint intervention is imminent.
Prior to the large-scale intervention in late July, the yen approached a 40-year low of 164 against the dollar. Following the joint action, it rebounded to around 155. However, this recovery lasted only three days. By August 3, the yen began to decline again, and on August 11, it traded in the 159 range against the dollar, retracing half of its earlier gains.
Market Anticipates September Rate Hike
Attention is now on the Bank of Japan's September monetary policy meeting, with expectations for a rate hike growing. In June, the BOJ raised its policy rate from 0.75% to 1.0%, a 31-year high, but kept it unchanged at its late July meeting. BOJ Governor Kazuo Ueda hinted at a press conference on July 31 that rates could be raised as soon as possible after September. The minutes from the June meeting, released on August 5, showed several members argued for further rate hikes to curb inflation risks. The July meeting also saw positive views on raising rates, with one member suggesting a need to "accelerate the pace of rate hikes" given inflation exceeding the 2% target.
The US has reportedly been privately urging Japan to raise rates. Fukuoka Financial Group's chief strategist, Toru Sasaki, believes a September rate hike is becoming a "must-choose" option: "After receiving US support for intervention, Japan needs to respond to US expectations for rate hikes." Some market views suggest the BOJ could raise rates to around 1.25% in September and further to 1.5% by December.
A Financial Times article argued that the US motive for joining the intervention was to prevent Japan from rapidly selling large amounts of US Treasuries, making the US the primary beneficiary. Japan could alter the yen's long-term weakness by sharply raising rates or selling US debt. However, the US relies on borrowing and needs global buyers for its bonds; selling US debt would raise borrowing costs and directly harm the US. The article suggested the event exposed key US economic contradictions, vulnerabilities, and limits of its power.
Before the Iran war, major global central banks, except the BOJ, were in a rate-cutting cycle. However, rising inflation pressures have changed this. Japan's 10-year government bond yield has now surpassed 2.8%, a near 30-year high, while the US 10-year yield has exceeded 4.6%. JPMorgan has raised its yield forecast for the end of 2026 to 4.85%. With the Trump administration facing midterm elections this autumn, the US is concerned that rising Japanese long-term rates could drive up US rates, slowing the US economy.
Fiscal Spending Nears Its Limit
On the other hand, rate hikes would constrain government spending, making the Ishiba administration potentially negative on the move. Japan's tax revenue currently cannot cover government expenditure, forcing the state to rely on a "borrow new to repay old" model, leading to a continuously expanding government debt. Data from the Ministry of Finance on August 10 showed that Japan's national debt (including government bonds, borrowings, and short-term securities) reached 1,346.6833 trillion yen (approximately 423 yuan per 10,000 yen) as of end-June, an increase of 2.8407 trillion yen from end-March, setting a new record. It is expected to reach about 1,493.8 trillion yen by year-end. Based on the latest population of 119 million, the per capita debt is about 11.31 million yen.
The Ishiba government plans to reduce the food consumption tax rate from 8% to 1% from April next year, using subsidies to achieve an "effective zero rate," requiring an estimated 5 trillion yen in funding. Simultaneously, the government is cutting taxes while significantly expanding defense spending. According to Japanese media, the Defense Ministry plans to request about 8.9 trillion yen from the Finance Ministry for the fiscal 2027 budget, a record high. As many of these requests lack specific amounts, the final defense budget approved by year-end could be even larger. With inflation pressures persisting, funding large-scale defense expenditures has become a challenge for the Finance Ministry.
A former senior government official reportedly said that Japan's fiscal spending reforms have nearly reached their limit. To significantly increase defense spending, the only funding sources are issuing more government bonds or creating new taxes. Both methods are highly contradictory and risky for the Ishiba administration. Amid ongoing public welfare issues, the Ishiba government is risking pushing forward its conservative agenda and "re-militarization" strategy. Its key policy achievements so far, such as amendments to the Imperial House Law and a plan to establish a "sub-capital" in Osaka, have failed to gain public support. Forcing the creation of a National Intelligence Agency through parliament, vague statements on the "Three Non-Nuclear Principles," and constitutional revision ambitions have drawn strong opposition from experts.
University of Tokyo professor Yutaka Uchiyama commented: "Ishiba has successfully advanced policies she personally favors, but has made little progress on issues the public cares about most." Regarding the food consumption tax cut plan, former LDP Secretary-General Shigeru Ishiba noted at a party meeting in Kagoshima on August 7 that the funding source for the tax cut remains unclear and not yet discussed, making a "tax cut first" approach risky. He stressed that consumption tax revenue is used for social security and local transfers, and "a tax cut without funding sources threatens the credibility of government bonds." Former Prime Minister Morihiro Hosokawa also wrote in the magazine Bungei Shunju, criticizing the insistence on "male-line male" imperial succession as severe gender discrimination. He questioned whether Ishiba's focus on "policies unrelated to the lives of citizens struggling with rising prices" is "truly the issue that must be addressed now." Former Prime Minister Fumio Kishida recently offered a subtle warning about Ishiba's challenges, stating that leaders must balance personal agendas with fulfilling election promises.
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