An economist who spent the past year arguing that Japan's central bank should delay interest rate hikes now says it can't wait any longer. Takuji Aida, an adviser to Prime Minister Sanae Takaichi and member of her flagship growth-strategy panel, expects the Bank of Japan to lift rates from 1% on September 18, followed by three additional increases after that, according to an analysis published by the Foundation for Economic Education on September 19, 2026. The forecast marks a dramatic reversal for a reflationist economist whose doctrine—cheap money, active fiscal policy, and the belief that belt-tightening brings deflation—formed the foundation of Takaichi's government just seven months after her landslide February victory.
The shift comes after the yen fell to roughly ¥164 against the dollar in late July 2026, its weakest point in nearly four decades. Tokyo responded by spending an estimated $85 billion over two days to buy back the currency, with the US Treasury joining in by selling euros from its reserves to purchase yen—the first coordinated intervention to support the yen since 1998. Markets have nearly fully priced in a quarter-point move to 1.25%, which would be the highest rate the Bank of Japan has reached since 1995. Inflation stood at 1.9% in July, up from 1.6% in June, while Japan's 10-year bond yield approached 3% on September 1, a level not seen since 1996. The government's current debt already exceeds 200% of GDP.
The currency collapse directly undermines Takaichi's signature policy: a cut in food consumption tax from 8% to 1% for two years starting in April 2027. The weaker yen raised prices for imported food and energy, with food inflation being the exact target of the tax cut proposal. According to the report, Bank of Japan Governor Kazuo Ueda has indicated the Bank will debate a move in September, stating that "we have come to believe that we need to pay greater attention than before to upside risks." The Bank's own April 2026 projection already forecast core inflation between 2.5–3% for the current fiscal year, driven by crude oil prices and companies passing wage increases into prices.
The report explains that the currency intervention worked temporarily but couldn't address the underlying interest-rate gap that caused the weakness in the first place, and depleting reserves is "definitionally, a finite instrument against a potentially infinite problem." Maurice Obstfeld of the Peterson Institute for International Economics described the situation plainly: "the Japanese authorities face a dilemma between raising interest rates—to strengthen the yen and dampen inflation pressures—and worsening fiscal sustainability." It's a zero-sum trade-off with no configuration that improves both problems. The timing is political, too—Aida moved his forecast forward because September offers a narrow window before an extraordinary session of the Diet convenes in October. Bloomberg reported on August 13 that the government already favored a near-term rate increase.
The consequences extend beyond Japan's borders. A weak yen puts pressure on other Asian currencies and could make it harder for China to continue allowing gradual appreciation of its own currency, as Brad Setser, who worked on currency policy at the US Treasury, noted in the analysis. But the most significant impact may be financial: as the world's third-largest creditor nation (behind China and Germany), Japan's banks, insurers, and pension funds have spent a generation exporting savings to offset poor economic conditions at home. Higher rates mean these institutions can now meet yen obligations with yen assets without paying to hedge or gambling on currency movements. The report warns that a tightening cycle encouraging Japanese money to stay home "could be a withdrawal of one of the deepest pools of funding in the global system," leaving the Bank of Japan facing an increasingly uncomfortable decision with no easy answer and consequences that reach far beyond Japan's coastline.