Why is Bassent so resolute in defending the yen this time?

In July 2026, the yen fell to nearly 164 against the U.S. dollar—the weakest level since 1986. From a starting point of 115 at the beginning of 2022, it depreciated by approximately 42% over three and a half years. The immediate cause of this depreciation is the interest-rate differential between the U.S. and Japan. While the U.S. Federal Reserve’s benchmark rate stands above 3.5%, Japan’s is only 1%. Borrowing yen to convert into dollars yields a risk-free profit just from the interest-rate spread. Yet this differential is merely the surface issue; what is truly driving the yen downward is a structural problem within the Japanese economy itself. Japan imports 95% of its crude oil from the Middle East. Any disruption at the Strait of Hormuz sends energy costs soaring. Following the outbreak of the U.S.-Israel-Iran conflict at the end of February 2026, daily oil transport volume through the Strait of Hormuz plummeted from 21.6 million barrels to 4.9 million barrels—a 77% drop. By July, Japan’s crude oil import value had surged 87.8% year-on-year, while import unit prices rose 78%. Meanwhile, global shipping costs are also spiking. Daily earnings for Very Large Crude Carriers (VLCCs) on the Middle East–Asia route hit a record high of nearly $800,000; freight rates for oil shipments from the Persian Gulf to Asia reached $15.22 per barrel—the highest since 2005. These surging freight costs will ultimately feed directly into Japan’s import expenses. Another often-overlooked variable: the Super El Niño. NOAA forecasts a 100% probability of a strong El Niño event occurring between October and December 2026, with a 95% chance of an extreme event. JPMorgan estimates that global food inflation will rise from 2.8% in the first half of 2026 to 5% in the first half of 2027. The pressure on food prices won’t fully materialize until 2027—but once it does, it will persist for a long time. Energy, freight, and food—three cost drivers rising simultaneously, compounded by yen depreciation itself amplifying import costs—means Japan is being pushed simultaneously by four powerful forces. Japan’s Corporate Goods Price Index rose 6.3% year-on-year in May, the highest in three years. According to Teikoku Databank, nearly 5,000 food items across Japan are slated to increase in price in September—triple the number from the same period last year. II. The Bank of Japan’s Dilemma: Raising Rates Is the Only Option—But Room Is Extremely Limited Faced with this situation, the Bank of Japan has alarmingly few policy tools at its disposal. Fiscal subsidies act like painkillers—they relieve symptoms but don’t cure the underlying disease. Raising interest rates is virtually the only viable tool left—at least it could slow the yen’s depreciation. In June, the Bank of Japan raised its policy rate to 1.0%, the highest in 31 years. Market pricing assigns a 97% probability to another hike—to 1.25%—in September. Yet the Bank faces a hard constraint: government debt. As of the end of June 2026, Japan’s outstanding government bonds and borrowings totaled ¥1,346.68 trillion, with public debt amounting to roughly 240% of GDP. In fiscal year 2026, Japan’s total budget stands at ¥122.3 trillion, of which ¥31.3 trillion—fully one-quarter—is allocated solely to debt-related expenditures. Here lies a critical mechanism: rising interest rates rapidly translate into higher government financing costs. Japan’s Ministry of Finance estimates that each 1-percentage-point increase in market interest rates would add several trillion yen annually to the government’s debt-servicing burden. Currently, Japan’s 10-year JGB yield has nearly doubled—from around 1.5% in mid-2025 to roughly 3% today. Compounding the problem, Prime Minister Takashi Kōno’s administration continues pursuing expansionary fiscal policy. Defense spending for FY2026 has risen to ¥9.04 trillion—breaking records for the 14th consecutive year. The government also plans to cut food taxes, resulting in tangible losses to fiscal revenue and forcing further debt issuance.

What Japanese people truly fear isn’t price hikes—it’s that businesses have finally reached their breaking point.

Japan’s convenience stores have never been remarkable for being cheap. Their real strength lies in one thing: you don’t need to think. Craving coffee at 2 a.m.? Just walk in—and it’s there. Too tired to cook in the rain? Bento boxes, onigiri, fried chicken, salads—all neatly displayed and ready. You don’t even need to plan your life in advance, because convenience stores have your back. So when convenience stores begin making you hesitate, a certain sense of security in Japanese daily life has already shifted. Recently, Reuters reported on a survey conducted by the Bank of Japan: Japan may face another wave of price hikes this summer—spanning food, dining, hot spring facilities, and more. The reasons remain familiar: energy, raw materials, and labor costs. But what’s truly noteworthy isn’t these cost pressures themselves—it’s the changing attitude among Japanese businesses: more and more firms are passing cost increases onto consumers faster and more proactively than ever before. If this statement were made about China, it might sound unremarkable. Costs go up → prices go up. It’s normal. But in Japan, this shift carries heavy significance. For decades, Japanese merchants adhered to an almost obsessive ‘culture of endurance.’ When costs rose, they absorbed them internally first; when staff shortages arose, store managers stepped in to fill gaps; when raw material prices climbed, portions shrank subtly—yet outright price hikes were avoided at all costs. Japanese consumers are extremely price-sensitive, and merchants dreaded being labeled as having ‘raised prices’ (‘neage shita’). Now, however, that tacit understanding is breaking down. It’s not that consumers suddenly became more generous. Rather, merchants have realized: if they keep enduring, they’ll be the ones to collapse first. So onigiri at convenience stores cost a little more; hot spring inns charge a bit more; izakaya menus creep upward; family restaurants follow suit. None of the individual hikes are shocking—but collectively, they produce a feeling unfamiliar to most Japanese: prices aren’t fixed; daily life itself is drifting upward. Japan’s Corporate Goods Price Index rose 4.9% year-on-year in April—the fastest pace in three years. At the same time, market expectations for Bank of Japan rate hikes are intensifying. The government is also preparing supplementary budgets to ease pressure on fuel, electricity, and water bills—and may even issue new debt to finance those measures. This creates a deep contradiction. On one hand, the government seeks to shield households from rising living costs; on the other, businesses have no choice but to raise prices. Meanwhile, the central bank worries about inflation—but cannot ignore broader economic pressures.

Japan May Face More Price Hikes for Food, Hot Spring Facilities, Central Bank Says

May 14, 2026

The Bank of Japan warns of broad-based price hikes this summer as firms pass on soaring energy and raw material costs linked to Middle East conflicts. Wholesale inflation reached a three-year high of 4.9%, driven largely by rising petroleum and chemical goods prices.

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