BoJ Hawks vs. Fiscal Doves: Japan's Policy Rift Leaves Yen in Limbo

Tokyo — The Japanese Yen (JPY) is caught in a turbulent tug-of-war between monetary tightening and fiscal expansion, as a rift widens between the Bank of Japan (BoJ) and the political administration.

Hawk Talk in Minutes

Minutes from the BoJ's December policy meeting, released this morning, reveal a growing consensus among policymakers that conditions for rate hikes are maturing.

• Inflation Overshoot: Board members noted that core inflation is tracking above the 3.0% forecast for fiscal 2025.
• FX Passthrough: Several members warned that the weak Yen is feeding into domestic prices faster than before, arguing that “waiting too long to hike carries significant risk.”

Political Headwinds

Directly countering the central bank's hawkish tilt, Prime Minister Sanae Takaichi is reportedly considering a suspension of the grocery consumption tax. While popular, the measure would slash tax revenue by an estimated 5 trillion yen, raising alarms about Japan's fiscal discipline.

Market Verdict

The contradictory signals have left the Yen volatile but lacking clear direction.

• USD/JPY: While the pair has softened due to broad USD weakness (trading near 152.00), the Yen's gains are capped by fears that the BoJ may be politically strong-armed into delaying normalization.
• Yields: JGB yields remain elevated as traders bet that, regardless of political pressure, the inflation reality will eventually force the BoJ's hand.

Analysts at Tokyo-based banks suggest that without a coordinated message from the Ministry of Finance and the BoJ, the Yen will remain highly sensitive to external factors, particularly US Treasury yields and carry-trade dynamics.