In my last post (#6, 29 October), I noted how, during his visit to Japan last month, Treasury Secretary Scott Bessent posted a pointed reminder to the new Takaichi government that its “willingness to allow the Bank of Japan policy space will be key to anchoring inflation expectations.” But also, that amid President Trump’s exuberant support for Japan’s new PM - and her Abenomics-inspired policies - Bessent’s comment was dismissed as an obligatory nod to policy probity, removed of its potential gravitas.
But it seems certain that Bessent’s comment reflects a genuine concern for Japan’s inflation, as he has expressed before. In only August, before Takaichi’s ascension, he said it far more bluntly; “The Japanese have an inflation problem… They’re behind the curve, so they are going to be hiking and they need to get their inflation problem under control.” Within the kitty-gloved diplomacy of the G7, where leaders rarely comment officially on each other’s monetary policy, the comment drew particular attention.
Indeed, in his 30 October press conference, after the BOJ decided against hiking rates, BOJ Governor Ueda appeared to address Bessent’s comment directly, saying that; “at present, we do not recognise any elevated concern that we are falling behind the curve”, despite the BOJ’s preferred measure of inflation remaining elevated above their 2% target for well over three years.
But in all this, I am reminded that before he became Treasury Secretary, Scott Bessent was considered one of the smartest, most prescient macro traders of his time, famous not just for his “Black Wednesday” bet against the ERM and the Bank of England in 1992, but for numerous Japan macro trades, including his short JPY/long Japan equities “Abenomics trade” of 2012–2013. Indeed, Bessent is widely seen as possessing a deep understanding of the BOJ–JPY–inflation nexus.
So when Bessent says that “the Japanese have an inflation problem”, it pays to understand his reasoning.
Economic theories around inflation and its causes are complex and often disputed, and a rigorous application of them to present-day Japan is well beyond the scope of this post. But let’s start instead with a standard ‘Economics101’ textbook checklist of ‘red flags’ for assessing if an economy is at risk of inflation becoming a “problem”, i.e., becoming unanchored. Such a checklist usually includes the following factors;
Now let’s assess how present-day Japan rates against each one of these factors…
FACTOR 1 – Rapid Growth in the Quantity of Money
ASSESSMENT: Somewhat Hidden, but Yes
This is the factor described in the famous Milton Friedman quote; “"Inflation is always and everywhere a monetary phenomenon.” It relates to the Quantity Theory of Money (Money Supply × Velocity = Nominal GDP). Japan’s credit growth and traditional money aggregates remain modest, but the risk here in Japan lies in the concept of “velocity “ - how fast money circulates. 30 years of deflation, reduced velocity here to extreme lows, reflected by vast sums of precautionary savings, and unlent deposits. If hoarded savings and bank reserves start flowing into spending, lending, or investment, velocity can rise sharply even without new credit creation, driving up Nominal GDP. That “pop” in velocity is clearly in play now, and given the vast stock of idle savings built up since the 1990s, the inflationary potential is significant.
FACTOR 2 – Excess Aggregate Demand vs Potential Output
ASSESSMENT: Yes
After five consecutive quarters of GDP growth, multiple institutions - Cabinet Office, BoJ, IMF, OECD, and a consensus of market analysts – have determined that Japan’s output gap has closed or is now even positive, meaning demand now meets or exceeds supply capacity. The BOJ’s October 2025 Outlook Report highlights robust consumption and investment growth amid a tight labour market and limited spare capacity.
FACTOR 3 – Supply Shocks and Cost-Push Inflation
ASSESSMENT: Yes
Recent sharp yen depreciation has driven up import costs for energy, raw materials, and food — adding to higher logistics and labour expenses and pushing firms to pass these on as higher consumer prices. In April 2025, electricity prices rose +13.5% y/y and food (ex-fresh) +6.5% y/y. Reports also warn of renewed energy-supply tightness as ageing power plants close, pointing to further cost-push pressure.
FACTOR 4 – High and Rising Inflation Expectations / Wage–Price Spiral
ASSESSMENT: Yes (and probably Yes)
Surveys show household inflation expectations far exceed the official CPI. The BOJ’s September 2025 Opinion Survey found 88% of households expect prices to rise within a year — near a record high — while a July 2025 survey reported average expectations of +12.8 % y/y (median +10 %) for the coming year and +9.9 % for five years ahead. Such elevated expectations heighten the risk of wage-price feedback. At the same time, BOJ’s October 2025 Outlook Report cited above notes: “Labour market conditions have tightened to a greater extent than can be explained by the output gap… Upward pressure on wages and prices is likely to be stronger than suggested by the gap.”
FACTOR 5 – Indexation of Wages and Prices / Built-In Inflation Factors
ASSESSMENT: Yes
Japanese wages remain largely shaped by the annual Shuntō (“spring offensive”) negotiations, where major firms and unions set benchmarks that cascade through smaller companies and public-sector pay rounds - a quasi-indexation mechanism. The latest 2025 Shuntō saw an average +5.25% pay rise, the largest in 34 years. The largest union confederation, Rengo, has already targeted another >5 % increase for 2026, showing past inflation feeding into future settlements.
Other behavioral factors in Japan reinforce a similar coordination in price rises. The BOJ has noted that one of the factors that helped fuel inflation in Japan in the early 1970s – when the country’s CPI rose the fastest among advanced economies – was “the norm among Japanese firms to conform with one another” which saw successive price hikes by companies “in a chained manner once moves to raise prices emerged.” It easy to see such dynamics at play again now.
FACTOR 6 – Fiscal Deficits Financed by Money Creation
ASSESSMENT: Half Yes (‘Half’ for the Money-Creation Part)
While not overtly financed by money printing, Japan’s persistent, large-scale deficit spending, are certainly procyclical, aimed at further boosting income and sentiment. PM Takaichi’s promises to revive the reflationary policies of Abenomics, two of whose “three arrows” were bold monetary easing and active fiscal stimulus. While not overtly direct money printing, these policies effectively offer an environment whereby easy monetary policy underwrites fiscal deficits, creating a mild fiscal-monetary fusion described in this factor.
FACTOR 7 – Loss of Central-Bank Credibility / Delayed Policy Response
ASSESSMENT: A Growing Risk (as Bessent warned)
This is an interesting factor in the context of Japan, as it’s questionable what credibility the BOJ ever had. For most of the last 3 decades, the BOJ has been trying – unsuccessfully - to win credibility that it could achieve sustainable positive inflation. Now that it has finally “achieved” that, it may prove equally difficult to convince that they can contain it. Add to this to the overt pressure from successive Japanese governments, most aggressively now from the Takaichi administration, for the BOJ to hold off raising rates, and it’s hard to have credibility in them to remain independent as inflation accelerates. At his 30 October press conference, Governor Ueda declined to comment on Takaichi’s aggressive stance on BOJ policy, but acknowledged that they “frequently exchanged views” and would continue to “closely communicate” with her government. These are the very points that Bessent was warning of.
Credibility is further strained by doubts over official inflation data. Surveys show a wide gap between official CPI (~3 %) and perceived inflation: households cite double-digit price increases, Teikoku Databank’s 50 000-item sample shows +10–15% y/y, and even the BOJ acknowledges subsidies are damping reported energy prices. When the public suspects inflation is higher than official measures, confidence in the BOJ’s control erodes.
TOTAL ASSESSMENT – A Failing Grade (…but maybe that’s deliberate?)
While some will no doubt argue with the detail and nuance of many of these assessments above. And to be sure, the Takaichi administration - with a compliant BOJ in tow - may have deeper reasons to fuel inflation further than a more sober assessment would perhaps recommend (as I discussed in my (#3, 8 October) post; Takaichi’s reflation push could do more to transform Japan than any reformist manifesto). But at least from a simple textbook checklist above, one can acknowledge at least that Scott Bessent has fair reason to be a little concerned. Time will tell if he still has “it”.
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