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Why Japan Can’t Spend: How Fiscal Law and Bureaucratic Power Shape the Yen’s Future

"An anime-style illustration of a determined young figure standing before a crumbling government building marked with the Ministry of Finance insignia, symbolizing the unraveling of Japan's rigid fiscal system and a call for reform." Forex Market News
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Why does the Japanese government, despite facing inflation, a shrinking population, and global economic pressures, hesitate to stimulate its economy through aggressive fiscal spending?

On the surface, Japan’s weak yen policy appears to be shaped by the Bank of Japan’s ultra-loose monetary stance. But beneath this narrative lies a deeper structural issue that even many market professionals outside Japan are unaware of: Japan’s fiscal policy is legally restrained by a post-WWII law designed by the occupying U.S. forces.

This article explores the invisible yet powerful grip of Article 4 of the Fiscal Law, a regulation that effectively prohibits the Japanese government from funding public spending through debt issuance. While central banks across the globe utilize deficit spending as a macroeconomic tool, Japan remains shackled to a self-imposed austerity model—despite having over ¥1,100 trillion in government-held assets.

The implications for FX traders are profound. Understanding Japan’s fiscal architecture is crucial to forecasting long-term yen dynamics—far beyond what central bank rate decisions alone can explain.

What Is Article 4 of Japan’s Fiscal Law?

At the heart of Japan’s fiscal rigidity lies Article 4 of the Fiscal Law, a clause enacted in 1947 under the direction of the Allied Occupation Forces (GHQ). The article reads:

“The expenditures of the State shall be financed by revenues other than public loans or borrowings.”

In plain terms, this means: Japan is not legally allowed to fund its budget with debt unless an exception is made. This principle, while rarely discussed in international financial media, fundamentally distinguishes Japan from other G7 economies.

Whereas the United States or the United Kingdom can deploy expansionary fiscal policies during downturns—injecting massive stimulus through budget deficits—Japan must justify any such action through special legislation. The default stance is fiscal restraint, not fiscal flexibility.

This constraint doesn’t exist because Japan is actually broke—it’s not. In fact, Japan holds over ¥1,100 trillion in financial assets, including government-held foreign reserves, pension fund surpluses, and public investment funds. However, Article 4 structurally prevents these assets from being mobilized via deficit financing unless exceptional measures are passed by the Diet.

What’s more, this clause gave birth to Japan’s now-infamous “Primary Balance (PB) surplus target”—a fiscal goal requiring that all government expenditures be matched by non-debt revenues by 2025. This is not just an accounting principle. It has become a political and ideological anchor that overrides economic logic—even during crises.

Recommended Explanation (English)

This deep-rooted constraint wasn’t born from economic necessity, but rather from post-war political engineering. Article 4 was part of a legal framework designed by the GHQ to neutralize Japan’s military and economic autonomy.

📺 Watch this broadcast from TOKYO MX that uncovers the origin and hidden purpose of Article 4.

Summary So Far:

  • Article 4 is a legal barrier to normal debt-financed spending.
  • It was introduced by GHQ to prevent Japan from becoming a military power again.
  • The clause remains intact, constraining Japan’s ability to respond to economic downturns.
  • This creates a long-term deflationary bias in Japan’s fiscal policy—an FX signal often overlooked.

The Hidden Cost: How Fiscal Austerity Undermines the Yen

At a glance, Japan’s reputation for fiscal discipline may seem commendable. In reality, however, it comes with a hidden macroeconomic cost that FX traders can no longer afford to ignore: persistent deflationary pressure and chronic underperformance of the Japanese yen.

Austerity and the FX Market

Japan’s adherence to the Primary Balance (PB) surplus target—a self-imposed restriction rooted in Article 4 of the Fiscal Law—means that fiscal stimulus is always “the last resort.” Even in times of economic stress, policymakers opt for tax hikes or spending cuts rather than injecting liquidity.

For FX traders, this creates a structural pattern:

  • During global risk-off events, the yen strengthens due to its status as a safe-haven currency.
  • But in risk-on environments or domestic crises, Japan cannot offset shocks with fiscal expansion.
  • This results in weaker internal demand, lower inflation expectations, and a lower natural interest rate—all of which place downward pressure on the yen.

2022–2023: Case in Point

During 2022–2023, while the U.S. aggressively raised interest rates and deployed targeted fiscal relief, Japan remained committed to fiscal restraint. Despite mounting energy costs and household distress, the government hesitated to enact full-scale stimulus. Instead, they emphasized “budget consolidation.”

As inflation picked up abroad, Japan’s Consumer Price Index (CPI) remained subdued—limiting the BoJ’s ability to normalize rates. The result?

📉 JPY fell to 151 per USD, a 30-year low—despite Japan’s large net international investment position.

FX traders who ignored the fiscal dynamics were caught off-guard.

Recommended Explanation (English)

📺 Video Breakdown: How Japan’s “Debt” Is Artificially Inflated Using Special Accounts

In this video, economist and former Ministry of Finance official Yoichi Takahashi explains how Japan’s public debt is intentionally overstated using a mechanism involving special accounts and debt redemption costs.

🔍 Key Takeaways:

  • A significant portion of the “national debt” is simply double-counted through transfers from the general budget to a special account
  • These transfers are used to repay old debt via refinancing, not to raise new capital
  • Despite this, the total is still presented as new government borrowing, supporting the illusion of fiscal crisis

💱 Why this matters to FX traders:
The perception of Japan as a highly indebted nation artificially depresses the value of the yen, making it seem riskier than it actually is.

▶️ Jump to [5:35] for the part where Takahashi reveals how refinancing debt is falsely reported as new issuance.

Key Takeaways for FX Traders:

  • Japan’s fiscal rigidity prevents responsive stimulus, limiting growth and inflation.
  • The yen is structurally disadvantaged in global monetary cycles.
  • Understanding the real fiscal stance—not the headlines—is key to forecasting JPY direction.

Why the Global FX Community Misses This — And Why You Shouldn’t

Despite its macro significance, Japan’s fiscal and institutional structure is often misunderstood or completely overlooked by global FX analysts.
This blind spot creates alpha opportunities—but only for traders who are willing to study the “deep Japan” story.

Superficial Narratives Dominate

The mainstream FX community often relies on shallow narratives:

  • “BoJ is dovish”
  • “Japan is a deflationary economy”
  • “Yen is weak because of rate differentials”

While not wrong, these narratives fail to explain why Japan remains perpetually unable to normalize, even when inflation seems to justify it.

The missing link?
➡ The political and legal constraints imposed by the Fiscal Law and the Ministry of Finance (MOF)—not purely economic fundamentals.

🧠 Most macro models treat Japan as a monetary phenomenon. But in reality, it’s a fiscal trap disguised as prudence.

Missed by the Models = Edge for You

Because few Western FX analysts speak Japanese or track legislative structure, most algorithmic or macro models treat Japan as a black box.
This creates rare opportunities:

  • JGB market behavior is misunderstood.
  • Monetary-fiscal divergence goes unpriced.
  • Market reactions to “austerity news” are often misjudged.

If you understand why the Japanese government won’t spend even when it should, you’re already ahead.

Key Takeaways for FX Traders:

  • Don’t just watch the BoJ—watch the MOF.
  • Japanese fiscal restraint is legally and ideologically entrenched.
  • This constraint causes mispricing in the yen, especially during regime shifts.

From Protest to Policy: What the Rising Backlash Reveals

Over the past year, Japan has seen a surge in civil unrest targeting the Ministry of Finance (MOF).
What began as small gatherings has grown into nationwide protests—from Tokyo’s Kasumigaseki to Osaka and Fukuoka.
This isn’t just noise. For macro traders, this is signal.

The Core Message: “It’s Not a Debt Crisis—It’s a Policy Crisis.”

Speakers at these protests consistently deliver one point:

❝日本には借金なんかないんです。❞
(“Japan has no real debt crisis.” – the late economist Takuro Morinaga)

The argument? Japan’s gross debt figures are deliberately inflated by omitting government assets and manipulated through accounting tricks like the 国債整理基金 (Fiscal Investment and Loan Program).

This growing public understanding is eroding support for austerity—and that’s not priced into the yen yet.

The anti-austerity narrative is moving beyond academics and into the streets


Combining emotional appeal with hard-hitting numbers—like a 62% national burden rate, the 15-month disregard for the fuel price trigger mechanism, and the revelation of 430 trillion yen hidden in special accounts—this speech ignited a moment of realization for many Japanese people.

Policy critique is now coming from insiders, not just activists

Testimony from a key political insider who spent over 20 years investigating Japan’s hidden financial structures—known for drafting the legislation that split the powerful Ministry of Finance into the current Ministry of Finance and Financial Services Agency. He also served as secretary to former Prime Minister Naoto Kan. His revelations include secret assets in Swiss accounts and the opaque world of Japan’s special accounts.

“Japan has no real debt crisis.” – the late economist Takuro Morinaga

▶️ Jump to [1:35] — “They’re saying something completely absurd: ‘We’re sitting on savings, but we can’t make ends meet because of debt—so please let us raise taxes!’” — This line by Takuro Morinaga perfectly captures the contradiction at the heart of Japan’s fiscal narrative.

Market Implications for FX Traders

As the fiscal narrative shifts in Japan, so too does the path of future government action.
If this public sentiment translates into real policy changes—like:

  • Relaxing PB targets
  • Activating fuel tax cuts (e.g., トリガー条項)
  • Unfreezing stimulus pipelines

—JPY will not behave like it used to.
What was once a structurally deflationary currency could become more politically volatile and policy-responsive.

🧭 This isn’t a protest—it’s an early indicator of regime change.

Takeaways:

  • Public pushback is growing and organized, not random.
  • Criticism is coming from former insiders and economists, not fringe groups.
  • This signals a tipping point—fiscal orthodoxy is no longer sacred.
  • For global FX traders, this is a leading indicator, not lagging.

The Invisible Hand: How Bureaucratic Power Shapes Yen Movements

In most countries, markets respond to central bank actions.
In Japan, however, there’s a shadow player that often outmaneuvers even the Bank of Japan: the Ministry of Finance (MOF).

Understanding Japan’s FX behavior without factoring in the bureaucratic command structure is like trying to drive blindfolded.

The MOF > BoJ Hierarchy: Who Really Calls the Shots?

Despite the formal independence of the Bank of Japan, the Ministry of Finance has:

  • Control over fiscal strategy (e.g., issuance of bonds, special accounts)
  • Influence over tax policies that shape domestic demand
  • Direct command of currency interventions

In fact, foreign exchange interventions are not carried out by the BoJ’s decision—they are instructed by the Ministry of Finance’s top currency diplomat, the 財務官 (Vice Minister for International Affairs).

📌 When Japan sold USD/JPY to fight depreciation in 2022 and 2023, it was the MOF that pulled the trigger—not the BoJ.

Market Distortion via “Special Accounts”

Japan’s fiscal system operates unlike any G7 counterpart…

One of the least understood levers the MOF controls is the 特別会計 (special accounts) system—off-budget, opaque, and powerful.

According to whistleblowers like former MOF official Mitsuyo Matsuda (松田光世):

“Japan’s special accounts contain mysterious funds and undisclosed assets, possibly stashed in Swiss bank accounts.”

This means MOF may have access to vast off-balance sheet reserves that can be used for interventions, infrastructure, or political engineering—without any need for Diet approval.

This directly affects the timing and scale of FX interventions, especially when market participants believe Japan is “broke” and cannot afford to defend the yen. That belief may be dangerously outdated.

These off-ledger mechanisms give the MOF a stealth intervention capability…

Why This Matters for FX Traders

  • FX traders often misprice intervention risk, assuming BoJ is the only actor.
  • In Japan, the MOF can mobilize interventions without parliamentary scrutiny.
  • Special accounts give Japan shadow ammunition—just when the market thinks the tank is empty.

💡 The MOF is Japan’s fiscal hedge fund—and they don’t publish a prospectus.

Key Takeaways

  • The MOF—not the BoJ—is Japan’s FX operator.
  • Japan’s budget system contains hidden liquidity pools (特別会計) not reflected in IMF or BIS data.
  • These off-balance mechanisms give Japan greater capacity to defend the yen than most traders expect.
  • Failing to account for MOF strategy is a major blind spot for FX positioning.

Implications for Global Traders: Repricing the Yen Narrative

For years, the yen has been treated as a “safe haven” in times of global uncertainty.
But if the underlying fiscal narrative is flawed or outdated, traders risk misjudging both direction and volatility.

It’s time to challenge the old assumptions.

Assumption 1: “Japan is bankrupt”

This belief is widespread among Western financial media and echoed in analyst notes.
But recent disclosures by economists like Takuro Morinaga and former MOF insiders reveal a different story.

🧠 “Japan doesn’t actually have a debt problem.”
— Takuro Morinaga, economic analyst (“As Morinaga pointed out, calling Japan bankrupt is like claiming you’re drowning in debt while holding over $8 trillion in assets.”)

Why it matters:
If Japan’s debt isn’t structurally dangerous, then there’s no automatic rationale for yen depreciation.
The “weak fundamentals = weak yen” thesis needs recalibration.

Assumption 2: “Fiscal discipline = market confidence”

Many foreign investors assume Japan’s reluctance to stimulate is a sign of prudence.
But the opposite may be true: “fiscal discipline” may be choking growth and inflaming inequality.

Consider the impact of Japan’s rigid adherence to Primary Balance (PB) targets—even during economic slumps.

🧠 “Article 4 of the Fiscal Law and the Primary Balance rule are mechanisms of postwar oppression embedded by the GHQ.”
— Satoshi Fujii, Professor at Kyoto University, from a TOKYO MX program

Sentiment Shift: The Rise of Domestic Backlash

On the streets of Tokyo and Osaka, something unusual is happening—ordinary Japanese citizens are protesting fiscal policy.

In March 2025, the “Abolish the Ministry of Finance” protests surged in popularity on X (formerly Twitter), with speeches going viral.

🎤“Unelected bureaucrats are the ones destroying Japan.”
— Koyo Imaizumi, from his viral speech at the Ministry of Finance Dismantling Protest (620K views, 120K likes on YouTube)

Trading Takeaways

  • The “weak yen = weak Japan” narrative may be based on institutional propaganda, not macro fundamentals.
  • Japan’s unique budget architecture (特別会計・基金) gives the government more dry powder than markets expect.
  • Domestic dissent is rising—a factor that could pressure political change, spending shifts, or BoJ-MOF realignment.
  • Repricing yen risk isn’t just about technicals or rates—it’s about understanding Japan’s post-war fiscal DNA.

Tactical Strategy: How to Trade the Yen in a Misunderstood Market

Japan isn’t the ticking debt bomb many believe it to be.
But the perception of that bomb—however inaccurate—still drives price action.

So how should global traders position themselves in a market where narrative and reality are diverging?

🎯 Strategy 1: “Narrative Fade” — Trade Against Panic When Fundamentals Disagree

When headlines scream “Japan is finished” due to rising debt, but insiders like Morinaga and Takashi Yoichi explain otherwise, that’s your cue:

🧠 Trade the fear, not the facts.

“Japan’s Ministry of Finance and the mainstream media are deeply entangled.”
— Mototaka Ikawa, former chairman of Daio Paper and outspoken critic of Japan’s fiscal establishment

📌 Use case:

  • Event: BoJ holds rates → Media warns of yen collapse due to debt.
  • Market: USD/JPY spikes up irrationally.
  • Action: Fade the move. Go short USD/JPY with tight risk, betting on mean reversion.

📈 Strategy 2: “Fiscal Turn Watch” — Position for a Regime Shift

Public dissent is rising. Protests like the 財務省解体デモ show that fiscal orthodoxy may soon lose its grip.

If the Japanese government starts to embrace expansionary policy (e.g., large-scale stimulus, tax cuts), the yen could:

  • Appreciate (due to expected growth + inflation)
  • Surprise markets who are underweight JPY assets

📌 Tactical Play:

  • Watch for policy rhetoric changes (e.g., PB目標の撤回、財政法4条の見直しなど)
  • Front-run the carry unwind:
    If Japan shifts policy while other central banks hold steady, JPY shorts could be violently unwound

Why Revisiting Japan’s Fiscal Law Article 4 Could Be a Breakthrough for Markets

Japan’s Fiscal Law Article 4 prohibits the government from financing expenditures with debt, effectively banning deficit spending except in exceptional cases. This legal constraint, combined with the policy target of “primary balance (PB) surplus,” has resulted in prolonged fiscal austerity—despite Japan’s chronic deflationary environment and stagnant real wages.

For FX traders, this framework has direct implications:

  1. Chronic Yen Weakness:
    The refusal to deploy aggressive fiscal stimulus forces the Bank of Japan (BOJ) to shoulder the burden of economic support alone. As a result, ultra-low interest rates and yield curve control persist, keeping the yen structurally weak against higher-yielding currencies.
  2. Asymmetric Policy Mix:
    While most developed economies combined monetary and fiscal stimulus post-COVID, Japan remained fiscally constrained. This divergence distorted carry trade dynamics and introduced persistent downward pressure on JPY.
  3. A Legal and Psychological Barrier:
    Article 4 is not just a legal clause—it’s a psychological ceiling that limits Japan’s policy flexibility. Removing or revising it could unlock a regime shift where fiscal stimulus becomes politically viable again.
  4. Market Breakthrough Scenario:
    If the Japanese government formally abandons PB surplus targets or moves to amend Article 4, it would signal a historic policy turn. The market could price in:
    • Rising bond yields (as fiscal expansion returns),
    • Revaluation of the yen (as expectations of balanced stimulus increase),
    • New capital inflows to Japan’s real economy sectors.

In short, revisiting Article 4 is the key to shifting Japan away from a monetary-only policy regime. For traders, this could reshape the long-standing assumptions that have underpinned yen weakness for over a decade.

🚨 Strategy 3: Intervention Alert — Watch the MOF-BoJ “Handshake Zone”

Japan’s Ministry of Finance has a track record of verbal and actual FX intervention, especially when USD/JPY climbs rapidly.

But few understand that intervention is sometimes scripted failure—telegraphed too early to be effective.

🧠 “They have to announce FX intervention 12 hours before acting.”
— A revealing statement by Mitsuyo Matsuda, former secretary to the Prime Minister of Japan

Why Matsuda’s revelation supports a contrarian FX intervention strategy:

Former Prime Minister’s secretary Mitsuyo Matsuda revealed that Japan’s Ministry of Finance is required to notify FX interventions 12 hours in advance.
This disclosure significantly undermines the effectiveness of surprise interventions — a key tool for influencing market behavior.

For traders, this means that any announced intervention becomes predictable, giving institutional players time to reposition and potentially fade the move.
In effect, the very mechanism intended to stabilize the yen may create a tradeable inefficiency, as Japan is signaling its hand before acting.

If confirmed, this practice turns traditional FX intervention logic on its head and opens the door for contrarian strategies — especially in highly liquid USD/JPY environments.

📌 Trading Edge:

  • If MOF announces a watch zone (e.g., 155.00), fade the panic 6–12 hours before likely action.
  • Set TP around support from prior intervention (e.g., 151.00 or 148.50)

📊 Summary Table: Yen Playbook for Global Traders

ScenarioMarket ReactionStrategic Play
Debt panic headlinesJPY sell-offFade narrative — buy JPY
Fiscal reform movementMarket confusedPosition for medium-term JPY strength
MOF intervention warningSpike reversal riskFront-run & fade intervention

Conclusion: Those who understand the JPY will dominate the next cycle.

Understanding Japan’s fiscal machinery isn’t just political curiosity—
it’s alpha.

The yen is a fundamentally strong currency, trapped in a legacy narrative.

Those who dig deeper, as we’ve done through analyzing leaked speeches, insider testimonies, and overlooked structural truths,
can position themselves ahead of the herd.

The next yen reversal won’t start with a chart. It’ll start with understanding.

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