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The Japanese yen has tumbled to a one-year low against the dollar, prompting Japan's Finance Minister Satsuki Katayama to express "deep concern" over the currency's "one-sided depreciation." Following a meeting with U.S. Treasury Secretary Scott Bessent, Katayama said her American counterpart shared this view, escalating threats of direct market intervention to support the yen.

Japan's Finance Minister Satsuki Katayama has expressed "deep concern" over the yen's rapid depreciation.

The currency's sharp slide, which saw it cross the key 158-per-dollar mark, was fueled by reports that Prime Minister Sanae Takaichi may call a snap election in February.

Snap Election Fears Drive Yen's Decline

Market speculation is mounting that an election victory would give Takaichi a firm mandate to pursue her expansionary fiscal policy. This prospect has put significant downward pressure on the yen.

However, a weak currency creates a policy dilemma. While it can benefit exporters, it also inflates the cost of imports, squeezing household budgets and potentially damaging Takaichi's popularity. After Katayama's remarks, the dollar briefly fell below 158 yen before rebounding to 158.925, its highest level since July 2024.

Tokyo Ramps Up Intervention Warnings

Japanese officials have become increasingly vocal in their warnings against excessive currency movements. Deputy Chief Cabinet Secretary Masanao Ozaki stated that the government "will take appropriate steps on excessive currency moves, including speculative ones," though he declined to comment on the election reports.

Finance Minister Katayama's comments from Washington, made after a bilateral meeting with Bessent, strongly hint at tacit U.S. approval for intervention. A senior Japanese government official added that Katayama had instructed him to coordinate closely with the U.S. if necessary.

This stance is based on a joint Japan-U.S. statement from September, which Katayama says gives Tokyo a "free hand." While the agreement reaffirms a commitment to "market-determined" exchange rates, it also reserves the right for intervention to combat excess volatility—a condition Japanese policymakers believe has been met.

When Will Japan Act?

Analysts are now on high alert for currency intervention, though the exact timing remains uncertain.

According to Hiroyuki Machida, director of Japan FX and commodities sales at ANZ, Tokyo's argument is that the yen's recent weakness deviates from economic fundamentals, especially as the interest rate gap between the U.S. and Japan has narrowed.

However, Machida believes the yen will continue to face selling pressure until the election outcome and the direction of fiscal policy become clear. This suggests that any intervention would require massive firepower to be effective.

"So intervention is possible anytime now," he noted, "but my guess is that wouldn't happen till the yen hits 160 per dollar."

Japan last intervened in the currency market in July 2024, after the yen weakened to a 38-year low of approximately 161.96 to the dollar.

Broader Policy and Geopolitical Context

While fiscal policy is in the spotlight, other officials have offered a more nuanced view. Economic Revitalisation Minister Minoru Kiuchi argued against blaming the weak yen solely on Takaichi's fiscal agenda. "Exchange rates and interest rates are determined in the market based on a wide range of factors," he said.

Beyond currency markets, the Washington meeting also covered critical mineral supply chains. Katayama told participants that Tokyo views Beijing's export ban on dual-use items as "highly problematic." She cited the ban's vague wording, broad scope, and re-export restrictions that affect third countries as major points of concern.

The Trump administration is escalating its campaign to lower borrowing costs for Americans, pursuing direct action that challenges the Federal Reserve's authority and raises concerns about overheating an already strong economy. With GDP growth tracking above 4%, the White House is deploying a mix of regulatory proposals and Treasury interventions to force down the cost of credit.

Over the past week, the administration has unveiled a multi-pronged strategy. This includes moves that Fed Chair Jerome Powell described as a "pretext" to weaken the central bank's independence, a proposal to cap credit card interest rates, and an executive order to purchase $200 billion in mortgage bonds.

An Aggressive Strategy to Lower Borrowing Costs

The administration appears impatient with the Federal Reserve's pace of interest rate cuts and is moving to implement its own form of monetary easing. The effort faces significant pushback from within the Fed, financial leaders, and even some congressional Republicans, but the White House seems determined to deliver relief to voters in a midterm election year.

The key initiatives include:

• A Credit Card Rate Cap: A proposal to cap credit card interest rates at 10% for one year.

• Mortgage Market Intervention: An order for the Treasury to buy $200 billion in mortgage bonds to reduce housing finance costs.

• Pressure on the Fed: A continued campaign to influence the central bank, which critics see as an assault on its independence.

Figure 1: This chart shows that U.S. credit card rates have climbed steadily to over 20%, far exceeding the proposed 10% cap, while the prime rate has also risen significantly since 2021.

While these policies are designed for popular appeal, their economic effectiveness remains in question. A 10% cap on credit card rates, for example, could backfire if lenders respond by revoking credit lines for higher-risk borrowers to protect their margins.

Figure 2: Major credit card issuers like Bread Financial and Synchrony Financial would see their net interest margins dramatically shrink if a 10% rate cap were implemented.

The political objective is clear: address voter concerns about the cost of living. Opinion polls consistently show that monthly credit payments are a major source of financial anxiety for households. For President Trump, being seen as actively fighting to lower these costs is a powerful political message.

Figure 3: While the Federal Reserve has begun to lower its policy rate, 30-year fixed mortgage rates have remained elevated, a key target of the administration's new policy.

Economic Red Flags: Is More Stimulus Justified?

Despite the political logic, economists are raising alarms. The primary concern is that these easing measures are being introduced when the economy is already running hot. Current financial conditions are considered loose, GDP growth is tracking at over 4%, and inflation is settling above the Federal Reserve's target.

Figure 4: After a period of strong stimulation, the real Fed policy rate moved into restrictive territory in 2023, suggesting that monetary policy is already working to cool the economy.

The administration's actions directly counteract the Fed's existing policy stance, which already accounts for prevailing credit rates and the gradual reduction of its mortgage bond holdings. If the White House successfully eases these conditions by decree, it could force the central bank to reconsider its own interest rate path.

Further evidence of economic strength comes from the labor market. The national unemployment rate recently fell below 4.4%, and annual wage growth has accelerated, showing few signs of a slowdown. Adding more stimulus now, on top of the fiscal boost from last summer's tax cuts, risks a "re-acceleration" of growth that could entrench inflation.

Figure 5: U.S. GDP growth has been robust, with tracking estimates from the Atlanta Fed projecting strong performance into early 2026.

The Long-Term Risks: Fed Credibility and Future Hikes

The most significant long-term risk is the erosion of the Federal Reserve's credibility. If the central bank is seen as bowing to political pressure, its ability to manage inflation could be permanently damaged.

Tim Duy at SGH Macro Advisors warns that this could lead to a "classic policy error of a central bank stripped of its independence." He argues that by mid-year, the debate might shift from rate cuts to resisting calls for higher rates.

Breaking from market consensus, which anticipates two more Fed cuts this year, JPMorgan now projects that the central bank's next move will be a rate hike in 2027. According to this logic, any politically motivated rate cuts now will only build the case for more aggressive tightening later.

The market reaction has been mixed. Wall Street stocks have rallied on the prospect of lower credit costs. However, the dollar's retreat and a surge in gold prices signal underlying anxiety about long-term inflation.

In a recent speech, Treasury Secretary Scott Bessent defended the administration's stance by invoking former Fed Chairman Alan Greenspan's decision to resist rate hikes during the 1990s tech boom. While Greenspan's approach allowed the internet economy to flourish, it is also remembered for enabling one of the largest stock market bubbles in modern history.

Source: Reuters

Prime Minister Sanae Takaichi’s consideration of a snap general election is sending shockwaves through Japan’s financial markets, raising concerns that political maneuvering could trigger a fiscal crisis by derailing critical government funding legislation.

Reports that Takaichi may dissolve parliament as early as this month for a February election have already pushed the yen and Japanese government bond (JGB) prices lower. The move, if it proceeds, would halt parliamentary business shortly after it convenes on January 23. This pause threatens the passage of an essential bill that authorizes the government to issue deficit-covering bonds, a cornerstone of its budget financing.

Figure 1: Prime Minister Sanae Takaichi's consideration of a snap election has introduced significant uncertainty into Japan's fiscal planning.

Understanding Japan's Deficit-Bond Dilemma

Japanese law strictly limits government bond issuance to "construction" bonds used for public works projects. To fund its massive stimulus packages and the rising social welfare costs of an aging population, the government has long relied on a workaround: a special, time-limited bill that permits the issuance of "deficit-covering" bonds.

The current five-year authorization is set to expire at the end of the fiscal year in March. To fund its spending plans for fiscal 2026 and beyond, the government must pass a new bill. Failure to do so would leave a massive hole in the national budget, creating a scenario many are calling Japan's version of a "fiscal cliff."

A Record Budget Hanging in the Balance

The stakes are exceptionally high. Takaichi's administration has laid out a record $783 billion budget, nearly a quarter of which is financed by debt.

Of the 29.6 trillion yen ($186.4 billion) in new debt planned for fiscal 2026, a staggering 22.9 trillion yen is composed of the deficit-covering bonds that require the new legislation. Without that bill, the government would lack the funds to cover its extensive spending commitments.

Political Fallout and Market Volatility

The political calculations behind a snap election are complex. While Takaichi's ruling coalition holds a slim majority in the lower house, it lacks control of the upper house. A decisive election victory could strengthen her political mandate but would still necessitate cooperation with the opposition to pass legislation.

Approval of the debt bill was previously considered a formality, with the opposition Democratic Party for the People (DPP) signaling its support. However, an early election could sour that cooperation, as it would sideline the DPP's own legislative priorities, including tax break proposals.

DPP leader Yuichiro Tamaki has now stated that his party's support for the debt bill is "in flux," according to Kyodo news agency. This new uncertainty has rattled investors.

"In terms of a snap election, there's little to be bullish about the bond market," noted Keisuke Tsuruta, a senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities. He warned that heightened political risk would make investors hesitant, potentially putting "upward pressure on the yield curve."

This pressure is already visible, with the yield on the benchmark 10-year JGB hitting a 27-year high on Tuesday amid expectations that a snap election could empower Takaichi to pursue even more aggressive fiscal stimulus.

Japan's Enduring Debt Challenge

The political turmoil unfolds against a backdrop of immense national debt, which stands at twice the size of Japan's economy—the highest ratio among major economies. Debt-servicing costs already consume over a quarter of government spending. These costs are projected to grow as the Bank of Japan continues to raise interest rates, compounding the long-term fiscal challenges facing the nation.

($1 = 158.8000 yen)

Donald Trump has issued a stark ultimatum, threatening a 25% tariff on any country that conducts business with Iran. The announcement, made as Washington assesses its response to major anti-government protests in Iran, marks a significant escalation in economic pressure.

In a Monday post on Truth Social, the US president declared, "Effective immediately, any Country doing business with the Islamic Republic of Iran will pay a Tariff of 25% on any and all business being done with the United States of America."

Trump added that the order was "final and conclusive," but offered no further details. Tariffs of this nature are typically paid by US-based importers, and Washington already maintains heavy sanctions against Iran.

White House Silent as China Pushes Back

Despite the definitive tone of the social media post, the White House website showed no official documentation of the policy. There was no information regarding the legal authority Trump would use to impose such tariffs or a clear list of targeted trading partners. The White House did not respond to a request for comment.

The move drew a swift response from China, a major destination for Iranian exports along with the United Arab Emirates and India. Beijing stated it opposes "any illicit unilateral sanctions and long-arm jurisdiction" and would "take all necessary measures to safeguard its legitimate rights and interests."

A spokesperson for the Chinese embassy in Washington reinforced this position on X, saying, "China's position against the indiscriminate imposition of tariffs is consistent and clear. Tariff wars and trade wars have no winners, and coercion and pressure cannot solve problems."

Tariffs as Leverage Amid Iran's Unrest

Trump's tariff threat comes at a time of high tension. Iran, which engaged in a 12-day war with US ally Israel last year and saw its nuclear facilities bombed by the US military in June, is now facing its largest anti-government demonstrations in years.

Trump has previously stated that the US might meet with Iranian officials and that he is in contact with Iran's opposition, while simultaneously threatening military action to pressure Tehran's leaders.

On Monday, White House Press Secretary Karoline Leavitt confirmed that airstrikes were among the "many, many options" under consideration but stressed that "diplomacy is always the first option for the president."

Leavitt also suggested a disconnect between public and private communications. "What you're hearing publicly from the Iranian regime is quite different from the messages the administration is receiving privately, and I think the president has an interest in exploring those messages," she said. Tehran confirmed on Monday that communication channels with Washington remain open.

A Closer Look at Iran's Protests

The demonstrations in Iran have evolved from grievances over economic hardship into direct calls for the fall of the clerical establishment. The Iranian regime has responded with a harsh crackdown.

Key elements of the government's response include:

• Mass arrests, with the US-based Human Rights Activists News Agency reporting over 10,600 detentions.

• Severe internet blackouts, making it difficult to gauge the situation from abroad.

• Public warnings that participating in protests could result in the death penalty.

While the Iranian government has not released casualty figures, the Norway-based NGO Iran Human Rights has confirmed at least 648 deaths. In response to the unrest, France has evacuated non-essential embassy staff from Iran.

The government has also organized pro-regime rallies, with tens of thousands taking to the streets of Tehran on Monday in a state-sponsored show of support.

Trump's Tariff-Heavy Playbook Under Scrutiny

Throughout his second term, Trump has frequently used tariffs as a tool to pressure countries over their ties with US adversaries or what he deems unfair trade policies.

This latest move adds to a trade policy agenda already facing legal challenges, as the US Supreme Court is currently considering a case that could strike down a wide range of Trump's existing tariffs.

The potential scope of the new Iran-focused tariff is vast. According to the most recent World Bank data from 2022, Iran, a member of OPEC, exported products to 147 different trading partners.

Russia is actively developing new strategies to bypass the latest US sanctions, ensuring the continued flow of its discounted crude oil to India, one of its most important customers.

Since the war in Ukraine began, India has emerged as the second-largest global buyer of Russian crude, taking advantage of steep discounts offered in the face of Western economic pressure. This trade relationship has strained ties between the US and India, with the Trump administration accusing New Delhi of financing Moscow's war effort.

Figure 1: Russian President Vladimir Putin and Indian Prime Minister Narendra Modi have maintained strong political and economic ties, underpinning the ongoing energy trade despite pressure from the US.

US Pressure Mounts on New Delhi

The diplomatic and economic friction has escalated in recent months. In August, the Trump administration imposed a punitive 25% tariff on Indian imports to the US, directly linking the measure to India’s purchases of Russian crude.

India, however, refused to alter its policy, asserting that its energy decisions are a matter of national sovereignty and would not be dictated by other nations. Trade negotiations between the two countries have since stalled. The White House recently intensified its threats, floating the possibility of 500% tariffs and withdrawing from several India-led global initiatives if the oil purchases continue.

Sanctions Show Initial Impact

The latest round of US sanctions, implemented at the end of November, was designed to specifically disrupt the Russia-India oil trade. The rules targeted any company or refinery purchasing oil from Rosneft and Lukoil, Russia's two largest oil exporters and the primary suppliers to the Indian market.

Initial figures suggest the sanctions had an effect. In December, India's imports of Russian oil fell by approximately one-third, dropping from a daily average of 1.7 million barrels to around 1.2 million barrels.

Despite this decline, industry analysts remain skeptical that these measures will sever India's reliance on Russian crude in the long run. Even after the sanctions took hold, four of India’s seven largest oil refineries continue to operate primarily on Russian oil.

Russia's Playbook: Shadow Exporters Emerge

Evidence already suggests that Russia is reorganizing its supply chain to help partners like India circumvent the sanctions. A significant loophole allows refineries to avoid US penalties as long as the crude is supplied by a company other than Rosneft or Lukoil.

By December, export data revealed the emergence of several new Russian oil exporters. These entities are believed to be shadow middlemen, created to stand between Russia's oil giants and foreign refineries.

"It looks like the new players are emerging, which is a sign that Russia is already trying to reorganise the supply chain," said Homayoun Falakshahi, head crude oil analyst at Kpler. "Obviously the Russians are not going to sit and just watch the sanctions take effect, they will try to bypass them as much as they can."

Falakshahi predicts these new companies will soon dominate exports, estimating it will only take "two or three months until the full supply chain gets reorganised." After that, he expects most barrels will be supplied by firms not named Rosneft or Lukoil, effectively neutralizing the sanctions.

The Irresistible Logic of a Steep Discount

For a country like India, which imports 90% of its oil, the economic incentive to buy Russian crude is powerful. Following the latest US sanctions, the discounts have become even more attractive, with Russian barrels selling for $9 to $10 less than comparable oil from Saudi Arabia or Iraq.

"For the companies that are still willing, buying Russian oil is a risk worth taking because it would represent savings of almost $4bn over a year," Falakshahi noted. "We expect that imports, at least by India's public sector, will soon return to the levels seen previously."

June Goh, a senior oil market analyst for Sparta Commodities, echoed this sentiment. "The discount is just too attractive for the Indian refiners not to buy the oil," she said. This market reality was reflected in global oil prices, which initially rose on the news of the sanctions but have since fallen back as traders concluded that enforcement would be limited.

One Exception: Reliance Halts Russian Imports

Not all Indian refiners are continuing with Russian oil. Reliance, India's largest private oil company and previously a top buyer, announced it would no longer import Russian crude for its Jamnagar refinery. The company cited its "impeccable record" of complying with sanctions, and January marked its first month with zero Russian imports.

This move appears to be a response not only to US pressure but also to EU sanctions that prevent Russian-origin oil processed in a third country from entering the European market. As the EU is a major export destination for Reliance's diesel and jet fuel, violating the sanctions posed a significant business risk.

As Reliance looks for alternatives, analysts suggest an opportunity may be emerging. The company is reportedly in talks with the US for authorization to resume purchases of Venezuelan oil, a market India previously sourced from before sanctions were imposed. A Reliance spokesperson confirmed they would "consider buying the oil in a compliant manner."