Sanae Takaichi’s “Open Hand” Intervention: BOJ Overhaul, Will the Yen Depreciation Storm Strike Again?

TradingKey - Just as the market focuses on when the yen can emerge from its depreciation mire, a series of personnel changes in Japanese politics and the central bank, and policy maneuvering have once again become the focus. As Japanese Prime Minister Sanae Takaichi officially nominated two reflationary scholars to join the Bank of Japan (BoJ) Policy Board, this power struggle over "hiking rates or easing liquidity" has reached a fever pitch.

On one side is Kazuo Ueda, who is determined to protect the fruits of inflation, Kazuo Ueda, and on the other is the "Iron Lady" who believes in "Takaichinomics." Coupled with Japan's stubbornly high inflationary pressures and the ongoing tug-of-war in the US-Japan interest rate differential, the yen exchange rate is sliding toward an abyss under internal and external pressures.

Two new BoJ board members emerge: What does the "parachuting" of Asada and Sato mean?

On February 25, the Japanese government officially nominated Tonichiro Asada, Professor Emeritus at Chuo University, Tonichiro Asada and Ayano Sato, a law professor at Aoyama Gakuin University, Ayano Sato as new members of the central bank's Policy Board, with the nominations expected to be submitted to the Diet for approval shortly.

This personnel adjustment comes at a sensitive time for the BoJ's monetary policy. With two existing board members set to step down, Sanae Takaichi's administration has quietly gained significant influence in shaping the central bank's future policy direction through these nominations.

As Professor Emeritus at Chuo University, Tonichiro Asada is a prominent representative of the "reflationary school" in Japanese economics. He has long advocated for eradicating deflation through expansionary fiscal and monetary policies. Ayano Sato has similarly shown an openness toward stimulus measures in her academic research.

The nomination of the two new members is unlikely to alter the BoJ's current overall pace of "gradual rate hikes," but it may lead to a more cautious approach regarding the magnitude and timing of such hikes, thereby weakening the yen's support from rate hike expectations.

Goldman Sachs stated that the short-term bottom for the yen exchange rate has yet to appear. As Sanae Takaichi's influence over the central bank deepens, the yen could test the 155-158 range against the dollar in the second quarter of 2026."

Is Sanae Takaichi's monetary policy stance hijacking the yen's trajectory?

Since taking office, the core of Sanae Takaichi's economic policy has been dubbed "Takaichinomics" by observers—revitalizing Japan's national strength through massive fiscal spending and flexible monetary policy.

On February 24 local time, the Mainichi Shimbun reported, citing sources, that during a meeting with BoJ Governor Kazuo Ueda last week, Sanae Takaichi explicitly expressed concerns over further rate hikes by the BoJ, with a stance significantly firmer than during their previous meeting in November. Following this news, the yen exchange rate plummeted, with the yen's decline against the dollar extending to 1.05% at one point, reflecting a market repricing of BoJ rate hike expectations.

In fact, Sanae Takaichi has long been known for supporting stimulus policies, prioritizing economic growth, and maintaining a cautious stance on rate hikes. As early as 2024, before becoming prime minister, she publicly stated that the BoJ's rate hikes at that time were "stupid."

Her core demand is very clear: to stimulate economic growth and stabilize approval ratings by maintaining accommodative monetary policy and expanding fiscal spending. Rate hikes, conversely, could lead to higher corporate borrowing costs and hinder economic recovery, running counter to her governance philosophy.

Takaichi's monetary policy preference is essentially to "prioritize growth over exchange rates and tolerate inflation." This stance will not only slow the BoJ's pace of rate hikes but also exacerbate fiscal debt risks and inflationary pressures. In the long run, it will continue to weigh on the yen, making its pattern of weak volatility difficult to change.

With two more BoJ board vacancies coming next year, how will Sanae Takaichi maneuver?

The nomination of these two new BoJ board members is only the first step in Sanae Takaichi's restructuring of the central bank's Policy Board. According to the BoJ's personnel schedule, two more vacancies will arise on the board next year, when more hawkish members are set to retire.

Takaichi will have more opportunities to adjust the board's composition and further dominate the central bank's policy direction. Her choice of successors will also be a key factor affecting the yen's long-term trajectory.

Given Takaichi's policy preferences and the logic of these nominations, she is likely to further strengthen the board's "easing orientation" when choosing successors next year. She will probably prioritize "moderate doves"—scholars or industry figures who favor growth stability and oppose excessive rate hikes—following the same strategy to gradually weaken the influence of hawkish members and ensure central bank policy aligns with government fiscal policy.

For the yen, if Takaichi continues to nominate dovish members next year, the board's easing orientation will be further reinforced. The BoJ's pace of rate hikes could slow even more or potentially pause. This would leave the yen without the support of rate hike expectations, keeping it in a long-term pattern of weak volatility and potentially pushing it past the 160 level into a new round of depreciation.

The divide between Sanae Takaichi and Kazuo Ueda exacerbates yen volatility

The trajectory of the yen depends not only on the pace of BoJ rate hikes and government intervention but is also closely linked to Japan's current inflation situation. Inflation levels directly determine the room for monetary policy adjustment. The disagreement between Takaichi and Governor Ueda on inflation further heightens the uncertainty surrounding the yen.

Japan's inflation has remained high in recent years, and has been characterized as "stubborn and primarily import-driven." Data shows that in January 2026, Japan's nationwide CPI rose 1.5% year-on-year, a two-year low but still above market expectations. Core inflation, excluding fresh food and energy, still rose 2.6%, well above the BoJ's 2% target.

Ueda's stance on inflation is more "rational and firm," emphasizing the central bank's policy independence and inflation control targets. He has explicitly stated that Japanese inflation has exceeded the 2% target for nearly four years. If his economic forecasts materialize, the BoJ is prepared to continue raising rates, gradually exit monetary easing, and stabilize inflation expectations.

Since taking office, Ueda has been committed to advancing the BoJ's monetary normalization by gradually tightening policy. In 2024, the bank ended its decade-long massive stimulus program and raised rates several times, hiking the short-term policy rate to 0.75% in December 2025, a 30-year high.

Trump's latest State of the Union address boosts the dollar as Fed officials strike a hawkish tone

U.S. President Trump delivered the State of the Union address on Tuesday night, his first since taking office for a second term. Trump declared that the U.S. is entering a golden age of the economy, claiming unprecedented growth, a sharp decline in inflation, rapidly rising incomes, and record highs for the stock market.

Trump explicitly opposed the Supreme Court's tariff ruling, vowing to bypass legal hurdles to maintain and increase tariffs. He emphasized "America First" and "fair trade." His hardline trade stance has pushed up expectations for dollar safe-haven status and support for the domestic economy in the short term, leading to capital repatriation.

Boston Fed President Susan Collins stated that, given recent economic data showing an improving labor market while inflation risks persist, interest rates are likely to remain unchanged "for some time."

Chicago Fed President Austan Goolsbee said it would not be appropriate to cut rates further until there is more evidence that inflation is sustainably receding.

Economists and market participants expect the Fed not to cut rates by 25 basis points again until at least June and project only two cuts this year. Goolsbee noted that if price pressures ease, the Fed could cut rates "multiple times" in 2026.

Investment banks are bearish on the yen, citing short-term volatility and persistent long-term depreciation pressure.

Facing a personnel reshuffle at the Bank of Japan, policy maneuvering between the government and the central bank, persistently high inflationary pressures, and the Federal Reserve's recent hawkish pivot, major international investment banks have updated their yen exchange rate forecasts, generally reflecting a pattern of 'short-term volatility and long-term bearishness'.

JPMorgan Chase is currently one of the most bearish investment banks on Wall Street regarding the yen exchange rate, its Head of Japan FX Strategy Junya Tanase stated that the yen's fundamentals are quite weak and unlikely to see significant improvement next year, expecting the USD/JPY exchange rate to rise to the 164 level by the end of 2026 as the yen depreciates further.

JPMorgan believes the Bank of Japan’s sluggish pace of interest rate hikes, continuous capital outflows, and inflation risks driven by government fiscal policy are the core factors weighing on the yen, while the resurgence of carry trades will further exacerbate depreciation pressure.

BofA Securities provided a relatively moderate forecast. Shusuke Yamada, its Chief Japan FX and Rates Strategist, expects the yen to continue depreciating in 2026, with USD/JPY breaking above the 160 level in early 2026 and stabilizing near 155 by year-end; meanwhile, EUR/JPY is expected to rise further to 190 in the first half of 2026.

Tohru Sasaki, Chief Strategist at Fukuoka Financial Group, offered an even more pessimistic forecast. He believes the root cause of the yen's weakness is that the Bank of Japan has not proactively raised interest rates, leaving real interest rates deep in negative territory. As the Fed's rate-cutting cycle is delayed and the magnitude of cuts reduced, the dollar's strength will persist, potentially leading to further yen depreciation, with the rate expected to weaken to the 165 level by the end of 2026.