Japanese Finance Minister Katayama warns against shorting the yen: We have "exchange rate dominance" and low interest rates will not allow economic growth

The yen depreciated after raising interest rates. Katayama warned that the market had miscalculated. Japan had already reached an agreement with the United States in May to obtain "discretionary power" to intervene. He also pointed out that low interest rates in the past three decades have not allowed economic growth, suggesting that Japan will move in the direction of raising interest rates and appreciating the yen.
(Preliminary summary: Full text of the Bank of Japan's statement: raise interest rates by 25 basis points, and will consider further adjustments in the future)
(Background supplement: Signal of the bottom of the Japanese yen? Morgan Stanley warns: The yen will appreciate by 10% in early 2026, and U.S. bond yields have fallen steadily)

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The Bank of Japan raised the policy interest rate to 0.75% last Friday, a record high of 30 The outside world thought this could reverse the long-term shadow of deflation, but they did not expect that the yen exchange rate would accelerate its weakening. Finance Minister Katayama directly warned the market on May 22, emphasizing that Japan has the "discretionary power" to enter the market at any time, and cited the agreement signed with the Trump administration in September as a backing, showing the official determination to protect the market.

These moves (short the yen) are clearly not based on fundamentals, but speculation.

Failed to raise interest rates: Dovish tone triggers sell-off

On December 19, the Bank of Japan announced an interest rate hike in a policy statement, but President Kazuo Ueda’s mild statement at the press conference made investors judge that there will be no major moves in the short term. This "dovish interest rate hike" quickly triggered a wave of selling, and the exchange rate once fell below the warning range of 160 yen per dollar. Katayama May described the current trend as "clearly disconnected from fundamentals" and named speculative funds as the main reason.

"Discretionary Power" Shows the Sword: Verbal Intervention Has Initial Effects

Katayama revealed that the joint statement signed with US Treasury Secretary Bessent in September confirmed that Japan can "act first and report later" when the exchange rate fluctuates excessively. She said in an interview with Bloomberg:

That means we have let go.

These remarks are equivalent to a warning to short sellers, and are interpreted by the market as "Katama Put". As soon as the news came out, the yen rebounded from a high of 160 to around 156.86, indicating that investors were temporarily tempering their enthusiasm for betting on depreciation.

Pressure for fiscal expansion: yields soar to 27-year high

There are deeper doubts behind the weakness of the yen: Takaichi Sanae's cabinet proposed the largest budget in history of 120 trillion yen, of which 18.3 trillion yen will be used for price subsidies and defense expansion. Huge spending has boosted demand for debt issuance, with the 10-year government bond yield rising to 2.1% and the 20-year bond yield exceeding 3.02%, setting new highs since 27 years and 1999 respectively. The Ministry of Finance is therefore faced with a dilemma: it must maintain low-cost financing to support the budget, but it must accept higher interest rates to defend the exchange rate.

Every situation is different, so it’s unrealistic to expect to follow the same pattern every time.

In the past 10, 20, or even 30 years, no matter what we did, economic growth has barely improved, and there is no point in continuing to follow the previous practices.

Exchange rate is national security: Weapon procurement costs eat into budget

Gao’s city government has pledged to increase defense spending to 2% of GDP. If the yen continues to weaken, the foreign exchange costs required to purchase advanced weapons from the United States will rapidly expand, diluting the budget effect. Katayama emphasized that maintaining exchange rate stability has become a national security issue, and intervention authority is the "last insurance" to protect defense purchasing power.

With the Christmas holiday approaching and liquidity declining, Katayama’s tough talk has set a red line for the market, but there are still doubts about how long the verbal intervention can be sustained. Outsiders expect that once depreciation pressure resumes, Japan may use approximately US$100 billion in foreign exchange reserves to transform its "discretionary power" from a statement to a substantive intervention. At the beginning of 2026, the confrontation between the Japanese government and global short sellers is bound to become more intense.