Japan Saved Its Stock Market — and Sacrificed its Yen

By protecting asset prices for years, the Bank of Japan ultimately left its currency exposed. A yen at a forty-year low, bonds in freefall and a stock market still hovering near record highs reveal less a contradiction than a distributional choice. Japanese households must now pay for the insurance policy extended to the markets.

A few days ago, I wrote here that the Bank of Japan had invented a comprehensive insurance policy: the “Uchida put,” an implicit promise that the institution would suspend its monetary tightening whenever financial markets began to falter. I saw it as the most accomplished expression of the moral hazard infecting contemporary monetary policy. The events of the past few days have provided a brutal demonstration: the insurer is discovering that its policy has turned against it—and that Japanese households are being made to pay the premium.

The entire picture can be captured in a single image. Despite its recent correction, the Nikkei remains at historically elevated levels, at around 65,000 points, supported in particular by the legacy of years of ETF purchases that made the central bank one of the largest holders of Japanese equities. At the same time, the dollar is approaching 164 yen, a level not seen since November 1986—another era, when Japan made the United States tremble and international agreements were signed, though then to weaken its currency rather than support it. A stock market near its highs and a currency in freefall: this is the Uchida put in all its glory, being exercised before our eyes, protecting asset holders while impoverishing everyone who holds yen.

Faced with this haemorrhage, Tokyo is reciting its familiar script. Finance Minister Satsuki Katayama is promising “appropriate and decisive action, without hesitation”—a ritual formula that no longer deceives anyone after the ¥11.7 trillion, or roughly $72 billion, deployed this spring produced an effect that evaporated within weeks.

Now the “whale” is being brandished as the ultimate threat: the Government Pension Investment Fund, or GPIF, with ¥293.6 trillion in assets, around half of which is invested overseas. Its holdings of US Treasury securities alone, estimated at $232 billion, amount to more than three times the Bank of Japan’s failed intervention this spring. The government insists that there is no question of radically altering the fund’s allocation and that, legally, the GPIF must act solely in the interests of pensioners. Yet if economic policy continues to fail to convince the markets, the state may ultimately resort to its citizens’ retirement savings as a possible last line of support for both the yen and Japanese bonds.

This is not yet a requisition. It is, however, evidence of rapidly shrinking room for manoeuvre. Japan’s leaders appear increasingly at a loss in the face of the turbulence taking shape. The problem is structural. Japan was supposedly forced to choose between defending its currency and defending its bond market. It has somehow managed to fail on both fronts. Meanwhile, the Bank of Japan is trapped—not by questions of solvency, since a central bank cannot go bankrupt in the conventional sense, but by the financial and political consequences of its own balance sheet.

It holds ¥518 trillion in government bonds, nearly half the entire Japanese sovereign debt market. Every rate increase raises the interest paid on bank reserves; every rise in yields deepens the unrealised losses on its portfolio. This is how the trap closes. The yen’s fall demands higher interest rates. Higher rates drive down bond prices and threaten the stock market. As soon as markets begin to falter, the Uchida promise leads investors to believe that the Bank will stop tightening. Yen weakness therefore generates precisely the financial instability that prevents the Bank from combating it.

Speculation against the Japanese currency is consequently not an irrational attack. It is the logical behaviour produced by the central bank’s own reaction function.

Moral hazard has finally caught up with its author.

This monetary debacle is now colliding with geopolitics. Before the war in Iran, Japan bought 94% of its oil from the Middle East, with 93% of those cargoes passing through the Strait of Hormuz. Tokyo says it has secured alternative supplies through March 2028 and holds reserves equivalent to 200 days of consumption. The immediate risk is therefore not that Japan’s petrol pumps will run dry, but that the country will pay vastly more for energy that must now be sourced from much farther afield.

One figure alone captures the violence of the shock: in June, Japan imported 13.7% less oil by volume while paying 59% more in yen terms. Buying less while paying far more is what happens when expensive oil collides with a weak currency. Importing energy priced in dollars with a currency at a forty-year low quite simply means importing inflation.

That inflation is already visible in electricity bills, food prices and the cost of rice, which has more than doubled since 2024. A generation that had almost forgotten inflation is rediscovering it just as its purchasing power had finally begun to recover. Real wages have now risen for five consecutive months, while annual wage settlements have exceeded 5% for the third year running. Yet this belated catch-up is already being swallowed by the cost of imports before it has even had time to produce its effects.

Then comes the political dimension, which the markets understand perfectly well. Sanae Takaichi’s government has struggled to dispel suspicions that it is pressuring the Bank of Japan to postpone further rate increases. The paradox is that Takaichi lays claim to Shinzo Abe’s legacy without possessing the political strength that underpinned Abenomics—a coherent doctrine with a clear hierarchy of priorities. In Japan today, no one knows whether the priority is the yen, the national debt or the Nikkei.

A central bank whose independence is in doubt, a currency whose value is in doubt, and a debt whose sustainability is in doubt?

Make no mistake: this is not merely a Japanese crisis. It is a mirror held up to every advanced economy that has allowed its central bank to absorb an ever-growing share of the bonds, assets and risks that markets no longer wished to bear. The lesson from Tokyo extends far beyond Tokyo.

When a central bank becomes the market, it cannot withdraw without triggering an extremely painful repricing. When a central bank provides insurance perceived as unlimited, it eventually becomes the casualty itself.

Every put is exercised eventually. This one is being exercised right now—against its writer and at the expense of those it purported to protect.