Bank of Japan chief navigates pressures from Takaichi and US Treasury on rate policy

Kazuo Ueda has what might be the least enviable job in central banking right now. The Bank of Japan governor just hiked rates to 1.25%, a level Japan hasn’t seen since 1995, and the reward for his trouble is pressure from two directions that want opposite things.

On one side, Prime Minister Sanae Takaichi wants him to keep monetary policy loose enough to support economic growth. On the other, US Treasury Secretary Scott Bessent wants him to hike faster to strengthen the yen and calm American markets.

The rate hike that pleased nobody

The BOJ’s two-day policy meeting wrapped on September 18 with a 25-basis-point increase, lifting the benchmark rate from 1% to 1.25%. The vote was 7-2, with the dissenters being appointees aligned with Takaichi’s growth-first agenda.

Markets responded with a collective shrug tilted toward skepticism. The yen weakened by roughly 1% following the announcement, drifting to around 157-158 per dollar.

The market’s logic is straightforward: if two of seven board members are already pushing back at 1.25%, how much higher can rates realistically go?

Governor Ueda framed the decision around inflation dynamics, noting that underlying price pressures are approaching the BOJ’s long-standing 2% target. His messaging suggested a preference for stabilizing inflation near that level without overshooting.

Takaichi’s growth mandate

Sanae Takaichi has been prime minister since October 2025. Her Liberal Democratic Party secured a supermajority in February 2026 elections. She reshuffled her cabinet just one day before the BOJ’s rate decision, on September 17.

For Takaichi, aggressive rate hikes represent a direct threat to the growth agenda. Higher borrowing costs slow business investment, weigh on consumer spending, and make servicing Japan’s enormous government debt pile more expensive. Japan’s debt-to-GDP ratio remains among the highest in the developed world.

The two dissenting votes on the BOJ board serve as a visible reminder that Takaichi’s influence extends into the central bank itself.

Bessent’s yen problem

Scott Bessent has been vocal about wanting the BOJ to normalize monetary policy faster, with the explicit goal of strengthening the yen. The US and Japan conducted coordinated yen-buying interventions over the summer of 2026, a significant escalation in bilateral currency management.

Bessent’s push for fiscal restraint alongside faster monetary normalization puts him squarely at odds with Takaichi’s spending-driven growth model.

What this means for markets

The post-hike yen weakness is a signal that markets don’t believe the BOJ will follow through with sustained tightening at the pace Bessent wants. At 157-158 per dollar, the yen remains historically weak.

For currency traders, the 7-2 vote split matters as a forward indicator. If Takaichi continues appointing dovish board members, the window for further hikes narrows over time regardless of what inflation data suggests.

The yen carry trade, where investors borrow cheaply in yen to fund higher-yielding positions elsewhere, also remains a major fault line. Even at 1.25%, Japanese rates are low enough to sustain carry trade mechanics.