Yen exchange rate falls below 153; will expectations of "New Abenomics" reignite US-Japan currency conflict?

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The new Japanese Prime Minister Sanae Takaichi's economic policy stance has sparked market expectations for a "New Abenomics", driving the yen exchange rate below the 153 mark and reigniting disputes between the US and Japan over exchange rate policy.

On Thursday, the dollar/yen exchange rate surged in the short term, now rising to 153, up 0.2% intraday, the first time since February. This level is seen as a politically and psychologically sensitive line, having previously triggered warnings or interventions from Japanese authorities, as it pushes up import costs and increases pressure on household living costs.

This exchange rate movement is reminiscent of Trump's previous accusations of Japan "manipulating the exchange rate". In March of this year, Trump again singled out Japan, accusing Tokyo of gaining unfair trade advantages by weakening its currency. He said he had called Japanese leaders and demanded they stop "continuously weakening and destroying the currency."

Now, with Sanae Takaichi in power, similar concerns may resurface. Despite the sharp market volatility, analysts pointed out that Takaichi may be extremely cautious in implementing economic policies to avoid tensions with key ally the United States. However, the future direction of the yen and the resulting domestic inflationary pressure will become the core challenges she faces in her early days in office.

The “Takaichi Trade” Sweeps the Market

The market has reacted visibly to Takaichi Sanae's victory. The Nikkei 225 index hit a record high, while the yen/dollar exchange rate fell below the 150 mark and further weakened to the 152 level. So far, the USD/JPY rate has reached 153.05, up 0.33 points from the previous trading day.

The 150-yen level is extremely sensitive both psychologically and politically. When the yen falls below this level, Japanese officials have previously issued warnings or intervened in the foreign exchange market, as this would push up import costs and increase the burden on household living costs.

Last year, the yen fell to a 34-year low, dropping to 161.96 per dollar. Even repeated interventions by authorities failed to stop the decline. Before Takaichi won the LDP leadership, the yen had appreciated about 6% against the dollar so far this year to 147.44. But since then, the yen weakened again to the 152 level, narrowing its annual gain to 2.77%.

Norihiko Yamaguchi, Chief Japan Economist at Oxford Economics, said concerns about imported inflation would prevent Takaichi from formulating policies that would push the yen even lower. Therefore, he believes the incoming prime minister will have to be "more realistic" in her policy stance.

History and Reappearance of Exchange Rate Disputes

A weaker yen has revived one of Trump's favorite topics: Japan would benefit from a weak dollar. This kind of criticism dates back to his days as a real estate tycoon.

Trump’s comments in March prompted then-Prime Minister Shigeru Ishiba to state in Japan’s Diet that the country was not pursuing so-called "currency depreciation policies". This has also been a repeatedly emphasized position by former leaders, including Shinzo Abe, when meeting with Trump.

As Sanae Takaichi, a protege of Abe, is about to lead the world's fourth-largest economy, similar concerns are emerging again. Takahide Kiuchi, Executive Economist at Nomura Research Institute and former BOJ policy board member, pointed out that he believes the Trump administration is already on the alert about the yen's weakness:

"Although I don't think it will invalidate the Japan-US agreement, the Trump administration may ask Japan to correct the situation of yen weakness."

Hirofumi Suzuki, Chief FX Strategist at Sumitomo Mitsui Banking Corporation, said the dollar/yen exchange rate has basically remained range-bound this year, and the yen has not entered a sustained downward trend. He believes:

"The so-called 'Takaichi trade' tends to weaken the yen in its early stages, but is not expected to last more than about a month, and is currently considered temporary."

Suzuki added that there is currently no expected impact on US-Japan relations, but if yen weakness continues for the medium to long term, it is expected to affect US-Japan trade relations.

Policy Balancing Act Under Inflationary Pressure

Although boosting exports is a policy effect that Takaichi Sanae may welcome, she also faces significant constraints at home. A weak yen, while favoring exporters that make up a large portion of the Nikkei 225, also pushes up import prices and could exacerbate imported inflation in the country. Data show that Japan's inflation rate has been above the BOJ's 2% target for more than three consecutive years, with overall inflation at 2.7% in August.

Norihiko Yamaguchi, Chief Japan Economist at Oxford Economics, said concerns about imported inflation would prevent Takaichi from advocating policies that would further depress the yen. Therefore, he believes the future prime minister must be "more realistic" in her policy stance. Yamaguchi expects that market pressure—especially the depreciation of the yen—will leave Takaichi Sanae with no choice but to accept the Bank of Japan possibly raising rates in December this year and mid-2026.

Several experts say that rate hikes will be necessary to curb inflation. As William Pesek, author of “Japanization: What the World Can Learn from Japan’s Lost Decades,” said in an interview on Monday, “Inflation will determine whether she still has her job in 12 months.” Jesper Koll, Managing Director of Monex Group, also agreed, stating that Takaichi will eventually need a stronger yen to reduce inflation:

“The loss of consumer purchasing power is the primary reason for the LDP’s unpopularity.”

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