Bank of Japan and Takaichi Cabinet: Implement Monetary Policy That Takes Yen’s Depreciation into Account

Editorial

15:00 JST, November 2, 2025

The troubling issue of high prices that the Japanese economy is facing is significantly influenced by the depreciation of the yen. It is crucial for the Bank of Japan to manage monetary policy while maintaining communication with the government and keeping a close eye on the foreign exchange market.

Following the launch of the Cabinet of Prime Minister Sanae Takaichi, the BOJ has held its first Monetary Policy Meeting and left the policy rate unchanged at around 0.50%. This marks the sixth consecutive meeting to keep the rate unchanged since a hike in January this year.

The BOJ ended its large-scale monetary easing policy in March last year and is now working to normalize its monetary policy. It has indicated its intention to raise interest rates in response to improvements in the economy and the situation regarding prices.

The Japanese economy continues its gradual recovery, but there are concerns that the high tariff measures imposed by the administration of U.S. President Donald Trump could hit corporate profits.

Although the Japan-U.S. tariff agreement resulted in lower tariff rates than initially anticipated, they remain higher than before. If companies become less inclined to raise wages ahead of the annual labor negotiations next spring, it could hinder a virtuous economic cycle in which wage increases boost consumption.

BOJ Gov. Kazuo Ueda said he wants to “check the impact of the high tariff policy a little more.” He must have judged that more time is needed before raising the policy rate.

It is also necessary for the BOJ and the Takaichi administration to share a common understanding of economic issues and policy direction.

Financial markets perceive that Takaichi intends to succeed so-called Abenomics — the economic policies held by the late Prime Minister Shinzo Abe — and aims to impose expansionary fiscal policy and easing monetary policy.

The hurdle for implementing rate hikes is believed to remain high — a situation that has caused the yen to briefly plunge to the ¥154 level against the dollar after the central bank’s policy meeting.

The Japanese economy is highly dependent on imports for food and energy. Excessive depreciation of the yen fuels inflation. The consumer price index for items excluding fresh food rose just under 3% in September, but food prices alone in the month increased over 7%.

While the BOJ expects food price surges to subside, the risk of this forecast being wrong cannot be ignored.

The biggest issue that the Takaichi administration is facing is high prices. The necessary medicine differs from that of Abenomics, which aimed for a complete exit from deflation. The government and the BOJ must advance their policies under this premise.

The purpose of monetary policy is to achieve price stability and sound economic development. Foreign exchange rates are not a direct policy target. However, a large interest rate differential with the United States clearly makes dollar-denominated investments more attractive, increasing pressure for the yen to depreciate.

The U.S. Federal Reserve Board has cut rates to a range between 3.75% and 4.00%, yet the interest rate gap with Japan remains significant. If the BOJ makes appropriate decisions regarding rate hikes, it can be expected that the excessive depreciation of the yen and high prices will be corrected.

(From The Yomiuri Shimbun, Nov. 2, 2025)