“You must not say that.”
After an economic and fiscal advisory meeting at the prime minister’s office on the 13th, Prime Minister Sanae Takaichi summoned Economy, Trade and Industry Minister Ryosei Akazawa for a private reprimand. The day before, Akazawa told NHK that “a rate hike is also an option” to respond to the yen’s weakness. While the stated reason was the principle that monetary policy is the BOJ’s domain, markets took it as a signal that the government does not want higher rates. The Nikkei business daily reported that this mood was clearly felt inside the prime minister’s office.
A little more than two weeks later, on the 29th in New York trading, the yen slid into the mid-160s per dollar, breaking the widely watched “160 line.” On the 30th in Tokyo, it failed to rebound from the low 160s, as a level long seen as a likely trigger for Japanese intervention gave way with little resistance. At the same time, Japan’s bond market delivered its own warning: the 10-year government bond yield, a benchmark for long-term rates, rose as high as 2.52% intraday on the 30th, the highest since 1997. With the BOJ holding its policy rate at 0.75%, market rates surged, underscoring a widening gap between policy and markets.
The immediate catalyst was the BOJ’s pause. At its policy meeting on the 28th, the BOJ kept rates unchanged. The number of members arguing for the need to raise rates increased to three, and the bank raised its inflation outlook, but it did not move to hike. Analysts cited the government’s cautious stance and instability in the Middle East as factors making it difficult for the BOJ to act quickly.
Political scrutiny also weighed on decision-making. Nikkei reported that Economic and Fiscal Policy Minister Minoru Kiuchi, seen as a cautious voice, attends BOJ meetings “in principle every time” to monitor deliberations. The BOJ’s restraint was also linked to frustration within the government after Ueda’s advance signaling ahead of a rate increase last December was priced in by markets, narrowing policymakers’ room to maneuver, the report said.
Meanwhile, external pressures intensified. With Middle East tensions persisting, concerns grew that a closure of the Strait of Hormuz could drag on, and oil prices became entrenched above $100 a barrel. For Japan, which relies heavily on energy imports, that translated quickly into inflation pressure. In the bond market, selling spread as investors priced in higher inflation, pushing yields up.
U.S. developments added to the strain. The Federal Reserve held rates steady at its April 29 Federal Open Market Committee meeting, but three regional Fed bank presidents opposed keeping dovish language in the statement, signaling continued tightening. As U.S. long-term yields rose, upward pressure spilled into Japan, and expectations that the U.S. would not pivot easily toward easing supported a stronger dollar.
In currency markets, those forces converged. Keiko Ninomiya, a senior analyst at SMBC Trust Bank, said expectations of a worsening trade balance from higher oil prices and a widening U.S.-Japan rate gap were working at the same time, adding that the yen could weaken further into the 161 range in the short term. Tsuyoshi Ueno, chief economist at NLI Research Institute, said current volatility alone was not enough to justify intervention, and that authorities would be more likely to respond if the yen moved quickly toward 162 per dollar.
Speculative money also piled in. According to U.S. Commodity Futures Trading Commission data, as of the 21st speculators’ net short yen position expanded to about 94,460 contracts, worth roughly 1.18 trillion yen, the largest in about 1 year and 9 months and the biggest since Japan’s government and the BOJ intervened in July 2024. Rinto Maruyama, a strategist at SMBC Nikko Securities, said hedge funds and others were increasing yen-selling positions as they judged that fundamentals were strengthening pressure for a weaker yen.
Bond investors voiced a more direct concern. Tadashi Matsukawa, a portfolio manager at PineBridge Investments, said that even as more BOJ members favored rate hikes and the inflation outlook was raised, policy was not following through. The remark was seen as reflecting worries that the central bank is “behind the curve.” Shotaro Gugo, a researcher at the International Monetary Institute, said a July rate hike was most likely at this point, but added that a June hike could not be ruled out if uncertainty clears.
Nikkei said Japan’s market dynamics are increasingly reinforcing each other: high oil prices lift inflation expectations and spur bond selling, while also deepening yen weakness through expectations of a deteriorating trade balance. The longer policy responses are delayed, the paper warned, the greater the risk of market volatility.
The paper also contrasted the BOJ’s response during the first oil shock, when it focused on stimulating the economy and fell behind on inflation control, with the second oil shock, when pre-emptive tightening reduced the impact. It warned that delaying hikes could raise the risk of stagflation, with surging prices and an economic downturn arriving together.
Authorities’ room to act is narrowing. Finance Minister Satsuki Katayama has repeatedly said Japan can take “firm and strong measures” against speculative moves, but skepticism about the effectiveness of intervention remains. Toru Sasaki, chief strategist at Fukuoka Financial Group, said the recent yen weakness reflects fundamentals as well as speculation, which could limit the impact of intervention. Yujiro Goto, a strategist at Nomura Securities, said that even if intervention occurs, its effect would likely last only a few weeks, at most until the next BOJ meeting in June.
Officials also face the risk that further yen weakness could fuel import-driven inflation and provide grounds for trade pressure from the Trump administration. The break below 160 yen per dollar and the move above 2.5% in long-term yields have become twin markers of Japan’s shifting financial landscape — a sign that markets and money are moving ahead while policy hesitates.
* This article has been translated by AI.
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