Professor Chen Zilei observes that the economic policies implemented under the Takaichi administration lack coordination between monetary and fiscal measures.
A striking example of the yen’s depreciation comes from Wang, a Chinese expatriate in Japan, who shared on social media: "A decade ago in 2015, my ¥1 million tuition fee cost over ¥70,000 RMB. Now, after a month of hard work earning ¥1 million, I get barely ¥40,000 RMB—losing ¥20,000 RMB in value."
Over the past six months, the yen has remained on a downward trajectory in forex markets. Surprisingly, even after the Bank of Japan (BOJ) raised rates by 25 basis points on December 19—the highest hike in 30 years—the yen continued to weaken. That afternoon, it slid to a four-week low of ¥157.76 per USD. The rout persisted this week, with the yen hitting ¥184.92 against the euro, ¥198.4 versus the Swiss franc, and nearing an 11-month low of ¥157.37 per USD. Against the RMB, it plummeted to a historic low of ¥0.045, meaning ¥100 now exchanges for less than ¥4.5 RMB—a 20% drop from three years ago.
Chen Zilei, Director of the Japan Economic Research Center at Shanghai University of International Business and Economics, explains that while rate hikes typically attract capital inflows and strengthen a currency, "this time, the yen depreciated post-hike, signaling market skepticism toward Takaichi’s policies."
**"Too Timid" on Rate Hikes?** Economists describe the BOJ’s move as "easing off the gas, not hitting the brakes." Despite 44 consecutive months of core CPI exceeding the 2% inflation target and mounting imported inflation pressure, the modest 25-basis-point hike falls short of stabilizing prices or the exchange rate.
BOJ Governor Kazuo Ueda further dampened expectations by emphasizing that accommodative conditions would persist, with future hikes contingent on 2026 wage negotiations. This "gradualist" stance shattered hopes of a hawkish pivot.
Post-hike, Japan’s 10-year government bond yield breached 2% for the first time since 1999, climbing to 2.020% and later hitting 2.070%. Chen notes that soaring yields reflect capital fleeing bonds—partly into equities but largely overseas—due to concerns over Japan’s fiscal risks.
BlackRock’s Japan strategist Yuichi Chiguchi warned pre-hike that lagging inflation control could destabilize markets, while Oxford Economics’ Nagai Shigeto projects 10-year JGB yields rising to 2.3% by 2027.
**Takaichi’s "Speculative" Policies** Okasan Securities strategist Rikiya Takebe attributes yen weakness to Takaichi’s aggressive fiscal stimulus, including an ¥18.3 trillion supplementary budget funded by new debt. "While U.S.-Japan rate differentials narrow, markets fear worsening fiscal health," he said.
Chen criticizes Takaichi for lacking a clear debt-repayment plan, relying instead on optimistic tax-revenue projections. "Her policies suggest short-term political calculations, not long-term stability," he added. Reports indicate next year’s budget may balloon to a record ¥120 trillion ($760 billion), risking debt-to-GDP ratios surging to 230% by 2030.
Public support for Takaichi’s cabinet has dipped to 67.5%, with 64.6% of respondents concerned about fiscal sustainability.
**Will Japan Intervene?** Chen highlights the contradiction between BOJ’s inflation fight and Takaichi’s stimulus. On December 22, Finance Minister Tsutomu Sato warned of "decisive action" against speculative forex moves, echoing top currency diplomat Atsushi Mimura’s alarm over "one-sided volatility."
Sumitomo Mitsui Trust Bank’s Masahiro Yamaguchi warns that unchecked yen declines could force the BOJ to prioritize exchange-rate stability over inflation, delaying tightening. Analysts expect two more hikes in 2024, potentially lifting rates to 1.25%, but intervention looms if USD/JPY nears 160—a threshold that triggered ¥100 billion in BOJ forex spending last year.
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