BOJ Rate Hike Decision Puts Takaichi's Economic Agenda Under Pressure

Japanese Prime Minister Sanae Takaichi's government is facing increased pressure from the yen's rapid rebound, which has put the Bank of Japan (BOJ) strategy under scrutiny. The strengthening yen has begun to unwind part of the yen carry trade, a long-running strategy where investors borrow yen at low interest rates and invest in higher-yielding currencies and assets.

The carry trade expanded over many years as Japan remained a low-rate economy while major economies offered higher returns. However, with the yen's rise and expectations of Japanese rate hikes, the logic of the trade weakens. Reuters reported that cross-border yen borrowing reached an estimated 360 trillion yen in March, highlighting the scale of exposure at risk.

The BOJ's decision on September 17-18 is now seen as a key test for Takaichi's government. Markets are pricing in a 25-basis-point rate hike to 1.25%, following a June increase and July hold steady. The question is no longer whether the BOJ will act, but how Takaichi's administration can balance household relief, fiscal discipline, and economic security.

Higher Japanese bond yields are also testing Takaichi's credibility as she promotes a 370 trillion yen public-private investment roadmap through fiscal 2040. The government is pursuing defense expansion and a temporary cut in the consumption tax on food from 8% to 1% from April 2027, but rising yields may require a more detailed funding plan.