Japan’s Prime Minister Sanae Takaichi said on Sunday that the government would take necessary measures against speculative market movements, after a sharp rise in the yen raised traders’ vigilance over possible currency intervention.
Japanese government bonds and the yen have sold off in recent weeks on concerns that Takaichi’s expansionary fiscal policy and the Bank of Japan’s slow rate of rate hikes could lead to additional bond issuance and too high inflation.
The yen had fallen near the psychologically important line of 160 yen to the dollar before suddenly surging on Friday after the New York Fed conducted an interest rate review. Some traders see the move as raising the possibility of joint U.S.-Japan intervention to halt the currency’s worsening slide.
A weak yen and a collapse in government bonds are a headache for the high market BOJ.
When asked about bond selling and the weak yen on a Fuji TV talk show, Takaichi said, “I don’t comment on specific market movements.”
“The government will take necessary measures against speculative or highly abnormal market movements,” he said, without giving details. The weaker yen is a headache for Japanese policymakers, as it pushes up import costs and broader inflation, eroding household purchasing power.
Mr. Takaichi has orchestrated a massive fiscal package to cushion the blow from rising living costs, pledging to suspend the 8% consumption tax on groceries for two years, causing a spike in bond yields and increasing the cost of financing Japan’s massive public debt.
He told a television program that the government aimed to start the two-year tax holiday sometime during the financial year starting in April.
Mr Takaichi is under pressure to deal with the collapse in the bond market, accelerated by his decision to call a snap election on February 8 for a mandate to strengthen expansionary fiscal policy.
“It’s very difficult to separate the market reaction from what’s going on endogenously in Japan,” U.S. Treasury Secretary Scott Bessent said last week, hinting at the U.S. government’s dissatisfaction with the impact of rising Japanese yields.
U.S. Treasury Secretary Scott Bessent delivers a statement at the 56th Annual Meeting of the World Economic Forum (WEF) at the U.S. House of Representatives venue in Davos, Switzerland, on January 19, 2026.
Dennis Bariboos | Reuters
“We are in contact with Japanese economic officials and I am confident that they will start making statements that will calm the market,” Bessent said at the World Economic Forum in Davos.
Since then, Takaichi has emphasized that Japan can secure enough funds for tax deferrals without issuing bonds.
Opposition parties propose using Bank of Japan funds to pay for tax cuts
Bank of Japan Governor Kazuo Ueda signaled on Friday that the Bank of Japan is ready to work closely with the government to contain the spike in yields, including through emergency bond purchases.
Market trends have emerged as a key issue in the election.
While the majority of political parties are calling for a consumption tax cut, some opposition parties are proposing that the Bank of Japan’s exchange-traded funds and government reserves set aside for foreign exchange intervention be used to finance the consumption tax cut.
Makoto Hamaguchi, a senior official with the opposition Democratic Party of Japan, said on public broadcaster NHK’s Sunday talk show that the Bank of Japan could accelerate sales of ETFs and use the proceeds more quickly for government spending.
Mr. Takaichi’s ruling party appears to be cautious about this idea.
“To use the reserves set aside for currency intervention, we need to sell U.S. bonds,” Takayuki Kobayashi, a senior member of the Takaichi Liberal Democratic Party, said on an NHK program. “That can affect the market and cause a lot of problems.”
Alex Saito, an executive with the Liberal Democratic Party’s coalition partner Nippon Ishin no Kai (commonly known as Ishin), pointed to problems that could arise from using the Bank of Japan’s ETF holdings to fund tax cuts.
Saito told NHK: “The use of the Bank of Japan’s assets risks undermining the independence of the central bank, and is a dangerous measure that could lead to further depreciation of the yen and rise in long-term interest rates.”
In September, the Bank of Japan decided to sell off its huge holdings in ETFs, accumulated over a decade of economic stimulus, at a pace of 330 billion yen ($2.1 billion) a year.
