Takaichi vs. the BOJ: Inside the Currency Alliance and the Prime Minister's Stubborn Streak

by Kenta Sato - Economic Analyst

Prime Minister Sanae Takaichi carried out a cabinet reshuffle on September 17. Seven ministers entered the cabinet for the first time, while she kept roughly half of the incumbents, including Chief Cabinet Secretary Minoru Kihara, Defense Minister Shinjiro Koizumi, and Foreign Minister Toshimitsu Motegi. What is notable is that, to advance the "responsible proactive fiscal policy" she champions, she retained her economic ministers - Finance Minister Satsuki Katayama, Minister for Economic and Fiscal Policy Minoru Kiuchi, and Minister of Economy, Trade and Industry Ryosei Akazawa. Dig into the reasons and a complex web comes into view: friction between the Prime Minister's Office on one side and the Ministry of Finance and the Bank of Japan (BOJ) on the other, plus "external pressure" from the United States. Here we explain the key figures in the second Takaichi cabinet and what each of them is after.

"Responsible proactive fiscal policy" and the 1% food consumption tax

"Under a responsible, proactive fiscal policy, we will accelerate measures to realize a strong economy." That is how Takaichi framed the significance of the reshuffle at a press conference afterward. On funding for the planned reduction of the consumption tax on food and drink to 1% next spring, she stressed: "There is no need to worry about securing revenue without relying on special deficit-financing bonds, so that we retain market confidence. The outlook is firmly in place."

There is a reason Takaichi spent so much time promoting "responsible, proactive fiscal policy" and rebutting concerns that a consumption-tax cut would worsen public finances. After her cabinet was formed in October 2025, the economic and fiscal policies of her administration - dubbed Sanaenomics - were welcomed by markets, and share prices climbed to record highs. Yet scrutiny at home and abroad of the swelling budget and the FY2027 budget requests has been harsh, and voices warning of fiscal deterioration have erupted. Combined with global trends, long-term interest rates rose to their highest level in about 30 years.

At the September 17 press conference, the prime minister prefaced her remarks by saying that the specific methods of monetary policy are for the BOJ to decide, and then added that she "expects appropriate monetary policy management." The comment was made with the BOJ's expected move to an additional rate hike at its monetary policy meeting through September 18 in mind, and it betrays her irritation with a central bank that will not adopt the policy her administration wants.

A prime minister and a central bank at odds

Needless to say, the relationship between Takaichi and BOJ Governor Kazuo Ueda is far from good. It is true that the expansion that began in June 2020 reached 74 months in July 2026, surpassing the 73 months of the "Izanami boom" (February 2002 to February 2008) to become the longest of the postwar era. Even so, real wages and personal consumption have struggled to grow, and few people actually feel the recovery. The prime minister and her advisers believe that two rounds of consumption-tax increases and the BOJ's monetary policy dealt blows to the Japanese economy and prolonged deflation.

Promoting investment in growth areas is the core of the Sanaenomics that Takaichi advocates; through inflation, she aims to expand nominal growth and increase tax revenue. The reasoning behind Sanaenomics is that potential growth is not rising because investment has fallen, and that reversing this requires the whole nation to get behind the "winning" growth industries.

Before becoming prime minister, Takaichi once said that "raising rates now would be idiotic," but the BOJ has gone ahead with hikes that amount to stepping on the economy's brakes. From the prime minister's side, it is only natural to fume: "Is the BOJ going to get in the way yet again?" Economist Yoichi Takahashi, one of the prime minister's advisers, has criticized rate hikes as "cooling the economy" and a "foolish policy." The thinking is this: just as the government is forcefully rolling out measures to expand nominal growth and boost tax revenue, what on earth is the BOJ thinking by slamming on the brakes?

The prime minister leans on the BOJ

It is fair to say there are two key figures when it comes to Japan's monetary policy. The independence of the central bank is of course guaranteed, yet Takaichi has conveyed her views to Governor Ueda both openly and behind the scenes. The rise in interest rates accompanying hikes drives up debt-servicing costs on government bonds and stokes fiscal anxiety. The prime minister has repeatedly asked the BOJ to avoid what she sees as an abnormal rise in rates.

"Why is the BOJ rushing to raise rates when prices aren't going up that much?" One government official makes no attempt to hide his irritation with the central bank. The nationwide consumer price index (excluding fresh food) is rising by 1.8%, and the view that, apart from food, inflation is not all that high pervades the Prime Minister's Office.

Japan is not a "demand-driven" economy where wages rise as they do in the United States. If the BOJ keeps raising rates in this environment, what will happen to small and mid-sized firms' capital investment, and to people who chose variable-rate mortgages? One former cabinet minister sneers, "Isn't Governor Ueda acting for the sake of the financial industry?" The Takaichi camp sees the single biggest driver of rising long-term rates not as inflation expectations or growth expectations, but as "the BOJ's monetary policy."

Food price hikes and the logic of the 1% tax

Food price increases in September 2026 covered about 5,000 items, the biggest wave of hikes in 2026. It is all but certain that the annual total will reach some 20,000 items. Behind this lie surging raw-material costs, higher logistics, and labor costs, as well as swollen import costs after the dollar-yen rate slid to a weak-yen level of 160 yen to the dollar.

In that sense, Takaichi is right to focus on food and aim for a "1% consumption tax." Cutting the rate to 1% from April 2027 and fully introducing an income-based cash-benefit system in FY2029 is a reasonable approach. As she sees it, this is still in the thick of the "battle against a deflationary economy." Since the economy is not actually in an inflationary state, opposing the BOJ's economy-cooling rate hikes is only natural.

The Finance Ministry, the BOJ and Washington

What worries the Prime Minister's Office is that the Ministry of Finance and the BOJ are "integrated" with the United States. Finance Minister Satsuki Katayama, who is close to the prime minister, is striking a delicate balance among "responsible, proactive fiscal policy," the United States, and the BOJ. When the Japanese and U.S. governments carried out coordinated yen-buying intervention at the end of July, she explained that Japan "will not hesitate to conduct further coordinated intervention going forward." Her subordinate, Vice Minister of Finance for International Affairs Jun Mimura, stressed on August 3 that Japan would maintain close communication with the United States, using the phrase "the completed form of a Japan-U.S. currency alliance."

The former cabinet minister quoted earlier sees this phrase "completed form" as important, because its timing overlaps with the way U.S. Treasury Secretary Bessent has been deliberately deepening his "engagement with Japan." On August 3, regarding the Japan-U.S. coordinated intervention, Bessent posted on social media that he was "in close contact with counterparts at the (Japanese) Ministry of Finance and the BOJ" and that "we will not hesitate to take part in further joint intervention," strongly backing moves toward monetary normalization such as a BOJ rate hike. Bessent has since suggested that Japan's large-scale monetary easing was a factor behind the weak yen, urging a break from "Abenomics."

Behind this is the aim of warning Japan against letting its rising rates spill over into sales of U.S. Treasuries or a rise in U.S. long-term rates - in other words, keeping Japan from continuing the reflationary policy of the Abenomics era. Bessent also boasted, "I'm the bookie. When we intervene on the yen, I know exactly how the Japanese side and the BOJ will move and what the Japanese authorities will do."

Governor Ueda is moving in step with Bessent. With Japan-U.S. coordinated intervention carried out for the first time in 28 years, the BOJ would end up at odds with the United States if it forwent a hike. Ueda, who met Bessent on August 30, said at a September 1 press conference: "We have consistently run policy with the goal of sustainably and stably maintaining the rate of price increases at 2%." He added: "We judge that the underlying rate of price increases, the trend in prices, has come close to 2%. It is very important to bring this smoothly to a soft landing at 2% and keep it there." In short, the BOJ will judge policy while weighing upside risks and the exchange rate.

The BOJ normally judges monetary policy with reference to general prices. But because a stronger yen is more convenient for U.S. exports, Bessent has been pressing for BOJ rate hikes. "Governor Ueda and the Ministry of Finance have Bessent behind them," one government official says of the current situation - meaning the Finance Ministry and the BOJ share the same direction as the United States.

US rates, Trump and the pressure on the BOJ

Needless to say, Washington's real aim is to keep U.S. long-term rates at a steady level. In the September 15 New York bond market, the yield on the 10-year U.S. Treasury note, the benchmark for long-term rates, briefly rose to around 5.04%, the highest level in 19 years, since 2007.

On September 16, the U.S. Federal Reserve (the Fed) decided on a 0.25% rate hike. It was the first increase in three years and two months, since July 2023, bringing the benchmark federal funds rate to 3.75-4.0%. President Trump, however, posted on his own social media, "Lower U.S. interest rates. And do it fast," pushing back hard with the claim that "because the U.S. is by far the most creditworthy country in the world, rates should be 1% or lower."

With midterm elections looming in November, the United States wants to avoid a situation where it is suffering from a strong dollar. That is precisely why it wanted the BOJ to raise rates. Amid a global wave of rising rates, Japan too saw the yield on the newly issued 10-year JGB briefly hit 3.035% (as bond prices fell) in the domestic bond market on September 15 - the highest since August 1996. An additional BOJ rate hike would add fuel to this.

The prime minister's limited hand

With the Finance Ministry and the BOJ joining forces and moving in step with the United States, the cards the Takaichi camp can play are extremely limited. Still, in the September 17 reshuffle, Takaichi retained Minister for Economic and Fiscal Policy Kiuchi. Kiuchi has been criticized for a lack of communication with the BOJ, but "had she replaced him, it would have meant the prime minister caving to 'external pressure,'" says the former cabinet minister - showing her stubborn streak.

Among key figures close to the prime minister, there is a sense that the BOJ's continued rate hikes are an obstacle to advancing "responsible, proactive fiscal policy," the administration's signature banner. For that reason, some close to the prime minister go so far as to murmur that "exercising the right to request a postponement of the vote may be unavoidable." This refers to a right stipulated in the Bank of Japan Act, under which the finance minister or the minister for economic and fiscal policy can request that the BOJ's Policy Board postpone a vote at a monetary policy meeting.

How will the Takaichi administration's economic and fiscal policy and the BOJ's monetary policy - which in a sense look diametrically opposed - steer the Japanese economy? After the reshuffle and the BOJ's additional rate hike, attention turns to the year-end drafting of the FY2027 budget and tax reform, and to the movements in prices, long-term rates, and the exchange rate leading up to them.