Once-Unthinkable 200 Yen Coming Into Market View

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All this has markets buzzing about a possible“Liz Truss moment” in Japan. The reference here is to the late-2022 debt crisis precipitated by the then-UK Prime Minister Truss, who tried to sneak an unfunded tax cut past bond traders.

The irony, of course, is that today's debt excesses are a hangover from the 1980s bubble years that left Japan with today's ginormous debt pile. The trauma from the bad-loan crisis that followed - including deflation - is why the BOJ first slashed rates to zero. That year, as fate would have it, was 1999 - the year to which yields are now returning.

“As long as Japan remains in denial on debt, every adverse shock will see the yen fall further,” notes Robin Brooks, economist at the Brookings Institution.“That's because the BOJ has no choice but to cap yields, even as the 'shadow' yield – what markets would price without BoJ intervention – goes up whenever a bad shock hits. Ultimately, what's needed in Japan is a shift in public opinion on debt, but for that to happen, things need to get worse before they can get better. The yen will keep falling.”

Whether a move toward 200, or beyond Plaza Accord-like levels, is plausible remains an open market question. But all this puts Takaichi in quite a bind. At least publicly, she has to signal alarm that the yen is weakening. Yet her economic strategy since taking office in October has largely relied on a weak yen.

And doesn't BOJ Governor Kazuo Ueda know it? In December, the BOJ hiked its benchmark to a 30-year high of 0.75%. Takaichi has made it clear she's against the BOJ continuing to tighten, calling the mere idea of higher short-term rates“stupid.”

Yet, as Takeshi Yamaguchi, economist at Morgan Stanley MUFG, points out, the consumer price index inflation is likely to exceed 3% later this year. And this, he notes,“could temporarily reach 4% year-on-year. In the event of an economic downturn, downside pressure on underlying inflation would intensify with a lag.”

Inflation is already twice the rate of 2025's 1.1% GDP growth rate. Last week, new BOJ board member Toichiro Asada warned that risks are rising amid surging oil prices and waning household demand.“Japan could ⁠be in a stagflationary trend,” Asada said.“It's hard to ​deal with such a situation with monetary policy.”

The International Monetary Fund sides with the BOJ. Last week, the IMF called on Team Ueda to push ahead with tightening, as the fallout from the Iran war poses“significant new risks” to the country's economic outlook.

The IMF's executive board commended Japan's“strong economic resilience” to global shocks and agreed the BOJ was appropriately withdrawing monetary accommodation.“They noted that as ​underlying inflation converges toward the BOJ's target, gradual rate hikes toward neutral should continue” in a flexible, ​well-communicated and data-dependent approach, the IMF said.

Yet, it's tempting to file this under better late than never. The Washington-based lender of last resort is right, of course. Just 20 years too late to an argument that was settled long ago.

If time travel were possible, Japanese officials might return to 2006, the last time the BOJ tried to normalize rates. And set the stage for the institution to ensure that efforts to move borrowing costs away from zero live on. They did not. Two decades later, it's easy to see why Japan would be better off if only the BOJ had held its ground.

By 2006 and 2007, the BOJ managed to hike rates to 0.5%, ending quantitative easing and putting Japan on the road to recovery and policy normalization.

In 2008, though, the global financial crisis was doing its worst to Asia's growth outlook. That year, with the BOJ under new leadership, policymakers began reverting to zero rates and QE.

Five years later, the BOJ supersized those previous monetary stimulus efforts. By 2018, the BOJ's balance sheet swelled to more than double Japan's economy, another first in G7 circles.

Only recently did Japanese officialdom realize it had another“lost decade” on its hands. The earlier one stemmed from the financial mayhem caused by the bad-loan crisis, which left Japan mired in deflation.

Yet the effort to repair damage from the last 10 years of economic growth meant squandering another 10 years that would've been better spent increasing Japanese competitiveness and innovation.