Japan's Reflationist Bet Falters as Weak Yen Forces Rate Hike

Japan's Prime Minister Sanae Takaichi's economic agenda is facing a new reality, as her government's reflationist policies are being challenged by the weak yen. The Japanese economy has been growing, with inflation at 1.9% in July, but the recent drop of the yen to ¥164 against the dollar has raised concerns about the country's monetary policy.

Takuji Aida, an economist who advises Prime Minister Takaichi and sits on her flagship growth-strategy panel, has changed his forecast from a December rate hike to a September 18 rate rise, followed by three more hikes. This is a significant shift, as Aida had previously warned that a December rate hike would be risky.

The cause of this change of course is the weak yen, which has raised the price of imported food and energy. The government's reflationary policies aimed to reduce food consumption tax from 8% to 1%, but the currency collapse has undermined these plans. Aida brought his forecast forward because September offers a narrow window before an extraordinary session of the Diet convenes in October.