Sayuri Shirai is a veteran of the Bank of Japan’s policy making board who helped move it from deflation to the early days of policy normalization when former BOJ governor Haruhiko Kuroka was in charge, and they were moving the Japan economy toward growth and normalcy.
Now as I ask her before the BOJ’s recent policy meeting, where it was expected to hold its key rate steady after it hiking after its June meetong, the issue has turned \to from how much and how soon it needs to do another rate hike to fight inflation, I ask her how much and how fast it needs to hike rates to stop the steep drop in the yen which has stabilized - at least for now.
When I had asked her before the BOJ’s July policy meeting to join me for an interview, it was pretty clear the issues would be simple: will the decline in the yen continue, what’s driving it, and do BOJ policymakers need to vote for their second rate hike in a row to prevent Japan’s currency from falling?
And then, just as the BOJ meeting was getting underway, the news broke that Japan’s Ministry’s of Finance led by Satsuki Katayama, and the U.S. Treasury led by Scott Bessent had launched a massive currency market intervention to prevent the yen from dropping further and prevent a run on the yen.
Will this work? So far so good. Sayuri sees the BOJ facing mounting pressure to normalize its ultra-loose monetary policy, especially in the context of a sharply depreciating yen. “I think…I noticed the Bank of Japan mentioned quite a lot about exchange rate movement. That is very different from previous meetings. So it’s very clear I think they pay attention to the exchange rate.”
She argues that currency interventions alone are insufficient: “I think…this time you support it. But in the end, just keeping intervention doesn’t really solve this.” Sayuri believes that the root cause of yen weakness is the interest <rate> differential, and only a shift in BOJ policy can address it.
However, Sayuri is also sensitive to the risks of tightening. “The Japanese economy, to be honest, it’s not very strong at all. Domestic economy is very weak and 75% of Japanese mortgage is based on floating rate... So it gives a lot of… damage to the Japanese economy. So it’s not it’s not easy. That’s one challenge.”
The Takaichi administration, according to Shirai, prioritizes growth through aggressive fiscal expansion and prefers a weak yen. “She <Takaichi> looks like she’s an expansionary person. Of course, she always said that she wants to increase the spending and tax cut for the sake of people. Right... But more than five, five months passed. So far she hasn’t really come up with the detail of the the numbers about what she will do, what spending.”
Sayuri sees the BOJ caught between its own predilection to tighten and internal political resistance to higher rates, with the government’s fiscal ambitions complicating the path to policy normalization.
She stresses the BOJ faces a complex set of challenges as it seeks to control inflation, support the yen, manage tensions with the Takaichi government, and maintain its independence. These difficulties are deeply intertwined, imbuing policy decisions with trade-offs and uncertainty.
First, the BOJ’s efforts to control inflation are complicated by Japan’s weak domestic economy. Raising interest rates to curb inflation risks harms households and businesses, especially given the prevalence of floating-rate loans.
Second, supporting the yen is a priority, especially after its sharp depreciation. Sayuri points out that currency interventions alone are insufficient: “just keeping intervention doesn’t really solve this.” The underlying issue is the interest rate differential with other major economies, and only a shift in BOJ policy can address the yen’s weakness. Yet, such a shift could further strain the domestic economy.
Third, the BOJ must navigate its relationship with the prime minister Sanae Takaichi’s government, which favors expansionary fiscal policy and low interest rates. This stance puts pressure on the BOJ to maintain accommodative policy, even as external actors like the U.S. push for normalization.”
So dive in and hear why on the one hand Sayuri sees the aggressive currency market intervention conducted jointly by Japan and the U.S. as an important step that has worked for now so well, and at the same time is a step that has potential pitfalls.
Spoiler alert: Sayuri is clear that the BOJ faces mounting pressure to normalize its ultra-loose monetary policy, especially in the context of a sharply depreciating yen. Yet the BOJ faces conflcit with the prime minister’s policy desires, which are limited by Japan’s own economic realities.
FX Intervention during a BOJ meeting 00:01:34:16
Yeah, this is very, very unusual, but we are expecting some we were expecting some kind of intervention happening because, you know, Finance Minister Katayama was mentioning, you know, quite a lot. And then, you know- intervention. So this will happen anytime soon. But very interesting that they did during Banco Japan’s meeting.
Lots of currency weakness in Asia 00:02:34:14
Yeah. So, you know, this is acknowledgment from the US government. The Japanese yen is extremely cheap, both in terms of the nominal effective exchange rate and real exchange rate. I look at the various Asian currency for India, Indonesian currency rupiah, Korean won also depreciating quite a lot over these past few years. But once you look at the both nominal and effective rates, the Japanese yen is exception.
US acknowledges a very weak yen 00:03:02:21
It’s extremely, extremely cheap. So I think latest US Treasury, you know, Treasury exchange report. They also acknowledge that the Japanese yen depreciation is quite quite substantial. So this is a very official acknowledgment, acknowledgment from US government that they may need to do something to correct this depreciation, probably for the sake of the global economy, global currency stability.
Dilemma: stabilize the yen but don’t sell a lot of US treasuries 00:03:43:13
Yeah. But at the same time I don’t think this want a lot of intervention because as you know most of these you know foreign these are the Ministry of Finance in Japan hold about 1.3 trillion you starters. And then most of them are kept in the form of US Treasury securities. So certainly, you know, this thing doesn’t want a lot of selling of US Treasury and just hinting that will also destabilize the US market.
US may support intervention now but not in the future 00:04:11:11
I think, you know, this time you support it. But in the end, I think this and U.S. government won’t. Bank of Japan to normalize interest rates. Otherwise, you know, just keeping intervention doesn’t really solve this.
Hard to fine tune this policy 00:04:41:20
Yeah. I don’t think it’s able to do that because it’s not very good. It’s signaling for the other countries. Like I said, there are also some other Asian countries whose currency are depreciating while Japanese yen special. Right. And then kind of coordinated intervention gives some idea that for the first time, U.S. government is really intervening in the exchange rate. It you know, kind of, you know, the exchange rate volatility and misalignment, etc., this really complicates the global order.
Still, a complicated picture and operation 00:05:12:19
I think that’s why I think that this time, even though it was a coordinated intervention. But it looks the US Treasury intervened by selling Euro and buying Japanese yen and data and yen, because otherwise it looks like, you know, they like to try to target some exchange rate, which is very bad for the global order. So I think they don’t want to do much. Yeah, that is my feeling.
FX intervention can become an adventure; it’s not a solution 00:06:11:01
Yes, that is adventure. I think that’s why, according to the polling place, the Treasury, U.S. Treasury intervening in euro market, in saving Europe and Japanese yen. I think otherwise, just between data and what they want to do, what is the target level. So I think cleverly probably I think they just I don’t think they can do much. This has to be corrected through interest differential.
Trying to follow Abenomics as much as possible 00:07:26:13
There is an inconsistency in terms of view about the Japanese yen and also the BOJ policy. For example I like to explain to you about the Prime Minister Takaichi and Takaichi standard view. According to various sources, it looks to us that Takaichi wants low interest rates. She wants to actually do something similar to… she wants to do something close to Abenomics; And, of course, the environmental is different, so she cannot do much. But that’s our rules. Monetary ease helps. She wants to strengthen the Japanese economy. And you know, she’s now giving a lot of energy tax and etc. to support domestic economy.
But not all view weak yen as the same problem 00:08:17:03
And the raising interest rates is not very good. So she’s quite clear that low interest are important. Also, people, the way she talks and also surrounded people think yes, depreciation is not bad at all because there are always not bad at all because there are people who benefit from the depreciation. For example, we have a huge number of foreigners involved.
The weak yen has its supporters 00:08:40:21
Everybody says so cheap Japan. So we have a flood flow of tourists. So certainly tourism sector is booming. And then the Japanese, who have a lot of foreign assets, are boosted, if they convert into the Japanese yen. And so those people who have assets that get a benefit and also a lot of foreigners because the cheaper yen. They are buying Japanese stocks Japanese real estate. But for us it’s very expensive to buy real estate. But according as you know, they just keep buying. Right. So there are certain sectors. There is the sector. There is doing so. And then also most important one, export sectors, even though the power hasn’t changed, but their profit from exporting and also from abroad once converting it to Japanese yen increase when in the present.
It has been a beneficial tax environment 00:09:34:19
So that related to stock price. So when you see all those positive impact you see I think that is one area administration is important. Also there’s a lot of tax revenue now for over five years. Thanks to inflation because inflation leads to higher price higher consumption tax you know and and depreciation higher. So more corporate profit. So tax living is improving actually.
Weak yen has made labor cheap 00:10:03:07
So they don’t say it. But there are many positive things. So that’s why it makes it clear where the Bank of Japan. Well you know they are worried about Japan’s yen super cheap labor. But to be honest there are people who think the current situation has nothing wrong so it doesn’t create inconsistency.
A huge legislative win but now five months on and no new policy 00:11:20:08
Yes. You know, she looks like she’s a expansionary person. Of course, she always said that she wants to increase the spending and tax cut for the sake of people. Right. And then there was a big reduction in in February 8th and she had a Grand Slam victory. But more than five, five months passed. So far she hasn’t really come up with the detail of the the numbers about what she will do, what spending.
This week she announced a food and beverage tax cut 00:11:47:04
She doesn’t have a big number yet. She also does not clarify sources of finance. For example, this past week she had a press conference and she finally announced she’s going to introduce who related consumption tax from 8 to 1%, not 0% 1% right after five months. But she still cannot come up with detailed sources. And then then she keeps saying I would I would not issue JGB and then how they so everybody wonder she say that but that even five months pass she could hint right.
Lots of fiscal talk – some hints- but no details 00:12:29:20
Some source of finance haven’t. And then internally and also domestically people say this is bad thing. She should not do it because construction tax is related to social and security expenditure. So a lot of local government because they also have to pay for social expenditure, very big opposition. So from local government they will lose, you know this tax related to to social spending. And so what is our sources. But she hasn’t come up. But don’t you think it’s a bit strange when months passed and she she dearly materialize. This campaign promises 0% food consumption, tax cut, defense spending and also big economic investment crisis management business. So far, she’ll come up with a detailed government spending and how she’s going to find us all more than five months. But don’t you think this is so? She looks like she wants to do a lot of fiscal policy, but nobody know how she’s going to do so. She can be implacable. This is another uncertainty.
The government blueprint 00:14:24:00
Yes. This is a very important thing. So how is like a basic policy on economic and financial management and reform? Okay. And each Prime Minister and cabinet issue around summer every year. And so this time at the end of June, so around June 30th, I remember. So they released the draft, okay. And they just took up a very comprehensive strategy and not much detail.
BOJ and government work together 00:14:48:05
But you know, what they are going to do for this will be reflected in the next accounting years, you know, fiscal policy. So anyway the draft came and then there was a two paragraph which really caught a lot of attention. So in the past they always say one sentence, you know, government and BOJ should work in a collaborative manner, communicate well.
Blueprint language to pressure BOJ? 00:15:11:07
But that already existed in a Bank of Japan art. So nothing special. Special. So they already know that. But this year they have two paragraphs. And what what they said, one paragraph said to strengthen Japanese economy, the appropriate monetary policy is extremely important. Okay. And then also they brought up this 2011. Sorry, 2013, sort of a joint statement between the Ministry of Finance and Bank of Japan, which showed about 2% target, etc. and that the okay, they brought up that too.
A growth strategy built on a low rates 00:15:49:10
So of course they don’t clarify and we want low interest rate. But from this kind of sentence, it was very strange. For the first time since this report is published, this kind of a sentence. And then everybody understood this means number one, they want low. Interesting. Okay. And make sure that the Japanese economy is it’s important. So that is a growth strategy. So monetary policy should be maintained low although she’s going to do big expansionary fiscal policy. Therefore they don’t want the cost of financing. So they want low interest rate also from this angle. Then we just you know, interest should be remain at low. So two things. So sort of a you know pressure to the yen and the expansionary fiscal policy.
Government Pension assets enter the discussion 00:17:36:10
Yeah. So there’s a sequence about this a negative report and GPI. So once this draft was released at the end of June people started to have concern. So if started ten year yield started to go up to 2.9%. Very high class and then started to decrease. It also like 162 okay. And then the beginning of July, all the sudden a finance minister talked about GPS and in in say she want to find the measures to promote more domestic financial investment.
GPI- a mega pension fund 00:18:15:05
Okay. Now GPI is one of the biggest public pension funds in the world. They manage about 1.93 trln US dollars, one of the biggest in the world. What they do because, you know, our pension system is a pay as you go, but it’s not enough. So right now, you know, government try to accumulate those premium. And about 20, 30 years from now they want to start withdraw this, you know, accumulated earning to take part of the, you know, pensioners benefit okay.
The allocations 00:18:46:17
So GBM the allocation is 25% for the for the foreign stocks, another 25% for the foreign bond, another 25% for the Japanese bond and another 25% for the Japanese stock. So equally allocated okay. And thanks to that they got a lot of a lot of. Okay. Now within this basic portfolio, they also have one more issue. Within 5% maximum, the money can be allocated to alternative alternative asset such as real estate, infrastructure.
Takaichi has wanted to shift more pension asset purchases into Japaness Instruments, but she does not control it 00:19:24:19
You know sort of unlisted credit you know segment okay. Yeah. So five 5%. But at the moment it’s not we don’t have a big asset. So only 1.5% I think from the various sources actually wanted to mention that this segment alternative investing more money for the domestic or alternative alternative asset, you know, is important. So they want to find a way to do it. The Minister of Health, who is in charge of this pension system and clearly said there is no, no, no immediate change with regards to this basic portfolio. And then this is determined independently by independent committee. Okay. And actually this is not for the, you know, to support Japanese market. Right. This is for the patients. So it has to be very carefully managed. Later she admitted they cannot change the basic portfolio. Okay. But what she said is this alternative. So I think the way she delivered maybe come down the market.
PM’s desire matters most 00:22:16:06
Though of course prime ministers decision is the most important. And then she prefers low interest rate. And she doesn’t think depreciation is crucial at all. Right. But at the same time this time U.S. collectively supported Japan to intervene foreign change market. Probably this means there will be greater pressure on the policy. And I think that Treasury Secretary Bessent and governor Ueda will meet at the G-20 you know governors meeting at the end of August.
One rate hiking, coming, perhaps in September 00:22:47:17
So I’m pretty sure, you know, to be encouraged to raise interest in September. Initially we thought it would be December, but maybe it was about to be to consider September. But they have to talk well with the Prime Minister’s office. So maybe one time interest hike is possible, but to two time hike is a bit challenging, I think, for the Japanese.
More than one hike? No. Economy is too weak 00:23:20:01
Because the Japanese economy, to be honest, it’s not very strong at all. Domestic economy is very weak and 75% of Japanese mortgage is based on floating rate. So every six years they have to change. And this is directly linked to the policy just by raising in June the, you know, the later interest rate from 0.75% to 1%.
Mortgage payments float and link to the policy rate 00:23:44:24
Right. For a lot of people it’s a very, very big payment to be honest. So it gives a lot of, you know, damage to the Japanese economy. So it’s not it’s not easy. That’s one challenge. And so it has a lot of small independent enterprises. We have a cost push. You know, domestic economy is nothing to do with domestic demand.
Inflation has been cost push rate hikes add to the problem 00:24:07:23
It’s a cost push. And then interest rate hike would give a additional burden. And I mean I have to be clear about it. And so there is a dilemma. So I think government and Minister Finance and Bank of Japan have to get together and understand what is most important. Is it stopping the depreciation. And you know, imported inflation is most important.
No clear consistent policy with Takaichi and BOJ at odds 00:24:29:19
You know, maintaining low interest rates regardless of the, you know, the exchange rate. And there is no clear consistent policy here. So they have to make it clear but also even Bessent. I think he is also very soft on this because in May he made a statement something like if the independence of Bank of Japan is insured, you know, he think, you know, Bank of Japan would make the appropriate policy.
Bessent seems to understand the issues and the politics 00:24:58:07
But that’s very unique statement like we don’t hear that kind of statement. So he understand he met Takeuchi also I think in May before he went to Beijing and then he really understood I think the idea you know, and so also, you know, best to send a signal that in that intervention is important. But at the same time he seems to understand this internal politics.
Complex economy, not week understood 00:25:26:24
So that’s why there’s a lot of uncertainty. It’s not easy. It cannot just say behind the story and then let me or today’s story is not that simple. Because its economy is so complex, people do not really understand what’s going on. Right. For example, if we want to buy a apartment, even second half house around Tokyo, it’s beyond our means. It’s too expensive now also because shipment of the foreigners by. And you know, of course construction costs are high. But you know, in the aging society, declining population, it’s very unbelievable.
Young are squeezed and the role of the yen in all this is not well understood 00:26:23:20
The prices are very high. So young people, they have to have a, you know, two income. You know, husband and wife. And then even that it’s extremely expensive. And what’s more, if they most of their people choose floating rate because interest rate is much lower compared to fixed rate. So very different from us people use floating rate. And so it’s, you know, very sensitive to the policy. You can you imagine just by 0.25%, people still need to spend quite a lot of money for the interest. So, you know, just thinking about this, you know, it’s not easy, I have to be honest with you. But and I wrote of people do not understand how this exchange rate depreciation is influenced in our economies. You know, it’s not clear.
Must stop yen depreciation 00:27:09:08
Right. Because so many foreigners coming you know lots of real estate construction boom because of the foreigners coming, etc.. So it’s not clear people don’t understand. So that’s why it’s so complex. You know, we don’t really know clear cut prices. But to me I think exchange depreciation is most important. But that view is not ,as widely held?>. I think it’s the most important. We have to really stop depreciating. And then probably and that we do you know you know, their own decision. I think at this moment we have to do this. But not everybody shares this view.
BOJ seems focused on the yen 00:27:53:19
I think you know I think it’s this time you know this July meeting I noticed the Bank of Japan mentioned quite a lot about exchange rate movement. That is very different from previous you know, meeting. So it’s very clear I think they pay attention to the exchange rate. And also they are not supposed to talk about it, but in many cases they repeatedly mention the exchange and the impact on the prices.
Policy must be consistent 00:28:21:13
So I share that view. But you know, then I think that’s why I think both Katayama and Takaichi have to be clear about it. You know, when Takaichi is sending signal, low interest rate depreciation. Okay. And then Katayama is intervening... So it’s so - you know, be consistent. That is the most important.
An opportunity for Japan to improve 00:29:44:00
So clearly want to do expansionary fiscal policy to strengthen our defense. You know strengthen our semiconductor AI. You know good opportunity that this you know geopolitical risk keeps opportunity for Japan. You know to get more aligned with the Taiwan or you know us you know Korea Semiconductor. Right. So it gives the opportunity. So Takaichi wants to really remake Japan semiconductor industry.
Rebuilding is the agenda, the plan may be too ambitious 00:30:11:18
We used to have very strong industry. But you know we are losing a lot of market share. And Korea so that Japan want to do that. So they need certain money and then more money to strengthen. Yeah. So and then also not only that she has 17 sector 17 sector. That is a bit too much. And then maybe she has to privatize.
But her finances are limited by circumstances 00:30:33:02
But she just talk about all of this. And then she really wants to stress in Japan, you know as one of the biggest reliable Asian economy, that is her hope. But so she’s hoping to spend a lot of money for that. But unfortunately she understands the market. You know, issue is there. We are now normalizing market. It’s very different from other was supported by Kuroda. Massive monetary easing needs to worry about interest rates. The BOJ is now normalizing them. So you know she has to face the fact that she is constrained by this market discipline. Right. So then that’s why in five months passing, she hasn’t really come up with detailed numbers and financing plans. So in the end I think she cannot do much.
Financing reality bites 00:31:21:10
I mean in terms of issuing JGBs it’s very difficult. So maybe she wants to do a lot of things, but she really has to try to find, you know, sources without depending so much on the GB, meaning that she cannot do as much as she wants. I think in the end that is what has happened.
The exchange rate must be corralled 00:31:59:00
So, it’s economics, you know that. You know what the BOJ wants. And then let them let them do it. Yeah. And then you know and then probably exchange rate is important. So try to prevent further depreciation is the most important thing. Of course there are a lot of positive impact. But in the end consumers and small medium enterprises are suffering most. That is most important. As long as these people are not happy, they always demand more money and tax cut and never ending. So you know let’s focus on you know, this cost. You know we have to pay. That is I feel you know clarify what is most important. And I think, you know, I am hoping the administration clearly understand that.
She needs to accept her limits 00:32:45:00
And then at this moment, maybe preventing against depreciation is quite important. And you know that does what is important for them. And, in the meanwhile, she can do some limited targeted fiscal policy and apply it. And then try to, you know, have a more effective structural policy. I mean 1746 we don’t have money to support.
Money must be spent thoughtfully 00:33:13:04
All right. Even the AI or semiconductor, but we don’t have a good data structure yet that AI can use. So the data is not collecting. She should spend more money to developing data infrastructure rather than just giving a subsidy to the semiconductor sector, which is not very effective. So, you know, use resources more cleverly and how to strengthen our economies. That is more important.
Accept fate and support the BOJ 00:34:00:18
She doesn’t need anything in this report. You know just let them know you can she can say I trust Bank of Japan and maybe currently depreciation a bit too much - I mean that’s enough I think.
A career message 00:34:18:03
That is a career message, right? And I mean otherwise why did they intervene, why is the U.S. government is supporting the Bank of Japan? I mean, this is something very, very unusual. All right.”
Sayuri Shirai
Sayuri Shirai is currently a professor of economics under Keio University’s faculty of policy management. She is also an advisor to both the Nomura Research Center for Sustainability and the Nissin Oillio Group.
From 2020-2021, she was a senior advisor to London-based EOS at Federated Hermes, which provides environmental, social, and governance (ESG)-related stewardship services on firms and public policy. Prior to that, she was an ADBI visiting fellow from 2016-2020, a member of the Policy Board of the Bank of Japan from 2011-2016, taught at Sciences Po in Paris from 2007–2008, and served as an economist at the International Monetary Fund from 1993-1998.
She has published extensively on topics such as central bank digital currency, monetary policy, global finance, and ESG investment. She is also a contributing writer to the Japan Times and a frequent Japanese and international media commentator on Japan’s economy and global monetary policies.
She holds a PhD in economics from Columbia University.
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