A Weak Yen That Persists After Rate Hikes, and the Second Engine Called Fiscal Policy
As the new year begins, the foreign exchange market once again serves as a mirror reflecting Japan’s overall policy stance. The Bank of Japan has moved ahead with a rate hike, yet the weak yen trend has not stopped. Behind this lies another force at work, one that cannot be fully explained by monetary policy alone: fiscal policy.
Using a bicycle as a metaphor, even if you squeeze the brakes a little harder, you will keep moving forward if someone is pushing you strongly from behind. The current yen exchange rate is structured in exactly this way.
Key Points at the Start of the Year
*The yen is in a phase where it reacts more to fiscal stance than to monetary policy
*The Bank of Japan has implemented a rate hike, but it is insufficient to curb yen depreciation
*From January to March, budget-related developments are likely to have a strong influence on the market
The Distance Between the Takaichi Administration and the Market
The Takaichi administration, which was formed last autumn, began with the banner of “responsible fiscal expansion.” This message acted as a tailwind for the equity market, pushing the Nikkei average sharply higher in a short period of time.
While rising stock prices brighten investor sentiment, they simultaneously trigger a different reaction in the foreign exchange market. Overseas investors who have gained unrealized profits tend to sell yen to hedge currency risk, making it easier for the yen to weaken as a result.
In addition, every time a large-scale economic stimulus is decided, the question resurfaces: is fiscal policy truly sustainable? This very doubt weighs heavily on the yen.
The Meaning and Limits of the Bank of Japan’s Rate Hike
The Bank of Japan decided on a 0.25% rate hike. While this marks a meaningful turning point, Governor Ueda’s explanations were extremely cautious. He avoided giving clear guidance on the level of the neutral interest rate or how far rate hikes might go, making it difficult to say that the market was given a strong directional signal.
As a result, even though interest rates rose, the market was left unable to see what comes next. This did not provide a compelling reason to actively buy yen. On the contrary, if yen weakness continues to push prices higher, it becomes easier to imagine the need for renewed fiscal stimulus.
This brings to mind a cycle of inflation → fiscal expansion → higher interest rates, a structure that tends to invite yen selling.
What to Watch From Early Year to Spring
After the new year, market attention gradually shifts toward budget deliberations. Spending requests from ministries remain at high levels, and debate over fiscal discipline is expected to continue during the regular Diet session.
At least during the January to March period, news and remarks related to fiscal policy are likely to move the yen more than the Bank of Japan’s monetary policy itself. This is a forecast, not a certainty, but past experience suggests it is a point that should not be ignored.
A Perspective for Facing the New Year’s Market
When assessing the yen this year, the key is not choosing between monetary policy or fiscal policy. It is observing both at the same time.
Monetary policy is the steering wheel, fiscal policy is the accelerator. Focusing on only one makes market movements difficult to understand. At the start of the year, market attention tends to concentrate on how hard the accelerator is being pressed. Keeping that in mind is likely to be the most practically useful perspective for navigating the market.