Markets rally on Sanaenomics, but yen slides as investors brace for looser policy

Prime Minister Takaichi Sanae is stepping into power with Sanaenomics, and financial markets are already reacting. Since it became clear she would lead the government in early October, the Nikkei 225 has rallied by about 11%, according to market data from Yahoo Finance at the time of her party’s victory.

But investors who hold U.S. dollars did not enjoy the full rally because the yen has kept sliding against the dollar. The currency is sitting near 154 per dollar, and that decline happened even while U.S. yields were moving lower.

That’s unusual because normally U.S. yields are the main driver of the dollar-yen exchange rate, as pointed out by analysts at Capital Economics reviewing recent spot rate movements.

The key reason behind the weaker yen right now is not interest rates but expectations of Sanaenomics, which is expected to echo Abenomics with loose fiscal and monetary policy. Takaichi told lawmakers she plans to drop Japan’s annual budget-balancing goal in exchange for what she called “a slightly longer-term view.”

Analysts at ING note that intervention from the Bank of Japan is unlikely at current levels, but if the yen approaches 160, there is a higher chance officials step in. For now, smaller currency moves could trigger what analysts call “verbal interventions,” where government officials begin warning markets they are watching closely.

Officials debate monetary policy and currency direction

There has also been unexpected commentary from outside Japan. U.S. Treasury Secretary Scott Bessent weighed in, presenting himself as a supporter of central bank independence in Japan and what he called “sound monetary policy.”

Japan’s finance minister responded by saying, “I don’t think he intended to prod,” but his remarks lined up with U.S. interests in seeing the dollar weaken against trading partners’ currencies.

Some economists say he’s not wrong to point out how slow the Bank of Japan has moved. Deutsche Bank’s Tim Baker noted that inflation has exceeded target by 30–50% cumulatively, but the BoJ has only raised rates by a fraction of what other G10 central banks did.

If the BoJ had followed the typical G10 response, the policy rate would be around 2%, not 0.5%. This puts Takaichi on one side of a delicate divide. She favors continued dovish policy, while the BoJ is trying to normalize and contain inflation.

While her administration cannot order the BoJ to act, the finance minister sits in on BoJ meetings, and analysts say the bank may not want to risk friction with a newly empowered prime minister.

Another force pushing the yen lower is a return to the carry trade. ING’s Francesco Pesole explained that the recent U.S. government shutdown stalled economic data releases, which reduced volatility in currency markets.

Lower volatility tends to make the carry trade more attractive, and the yen is the easiest funding currency for that trade.

Balancing market gains against household pressure

A weaker yen may look good for some companies in the short term, though many major exporters have moved production abroad and benefit less than before.

Meanwhile, Japanese households have been taking losses from currency-driven inflation and have been selling domestic equities since 2023.

Foreign investors may also hesitate to enter a market where the currency keeps falling. This means Takaichi must manage a rising stock market and a declining yen at the same time.

To understand where things may head, it helps to look back. When Shinzo Abe took office in late 2012, consumer prices were falling, growth was below potential, and the yen was strong.

His three-arrow program (monetary expansion, fiscal flexibility, and structural reforms) pushed Japan out of deflation and delivered the second-longest economic expansion in the post-war era.

But Takaichi faces a different reality. Inflation has been above BoJ’s target for three years, wage growth is flat, the population is older and smaller, climate risks are heavier, and public debt is higher. Analysts argue that combining the Abenomics framework with Kishida’s push for a “new form of capitalism” could give Japan a more balanced and more resilient system.

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