Kevin Warsh<\/p>\n
Andrew Harnik\/Getty Images<\/p>\n
Kevin Warsh\u2019s first month as Federal Reserve chair has upended almost every expectation.<\/p>\n
The White House had assumed it was installing a rate\u2011cutting ally \u2014 a dovish partner for President Donald Trump\u2019s growth agenda. Instead, since Warsh took over on May 22, the Fed has tilted hawkish because the data leaves him little alternative. May consumer prices rose 4.2% year\u2011on\u2011year<\/a>; the Fed\u2019s preferred PCE gauge climbed 4.1%. With inflation running that hot, even a hint of easing would ignite a bond\u2011market revolt, drive yields higher, and unsettle the very Wall Street constituencies Trump can least afford to rattle.<\/p>\n Warsh isn\u2019t defying Trump so much as recognizing reality: ignoring inflation now would be far riskier than disappointing the White House. Oil markets underscore the point. A return to pre-Iran-war price levels looks distant at best, and perhaps impossible, with Trump-driven risk premia now embedded in every barrel moving through the Strait of Hormuz.<\/p>\n If Warsh wants a preview of how his 2026 may unfold, he may find the clearest signals coming from Tokyo.<\/p>\n Bank of Japan Governor Kazuo Ueda\u2019s year has unraveled on multiple fronts. A Middle East war \u2014 something neither his board nor Prime Minister Sanae Takaichi\u2019s team saw coming \u2014 has pushed the BOJ\u2019s internal inflation gauge to 2.8% as growth forecasts sink toward 0.5%<\/a>. That\u2019s the textbook setup for stagflation.<\/p>\n It leaves Ueda trapped between two bad options: keep tightening to contain inflation and finally pull Japan out of a rate regime that has hovered near zero for almost three decades, or avoid a political showdown<\/a> with a government that wants none of it. Team Takaichi\u2019s \u201cSanaenomics\u201d depends on ultralow rates and a weak yen \u2014 and sees BOJ hikes as sabotage.<\/p>\n Never mind that Japan\u2019s 27\u2011year experiment with zero rates has done more to sap Japan Inc.\u2019s dynamism than revive it. When a central bank becomes the political establishment\u2019s round\u2011the\u2011clock ATM, the incentives to reform evaporate.<\/p>\n All that easy money spared elected leaders from tackling the hard stuff: making labor markets more meritocratic, boosting competitiveness and productivity, rewarding innovation, narrowing the gender\u2011pay gap, and persuading multinationals clustered in Hong Kong and Singapore<\/a> that Tokyo deserves a second look.<\/p>\n History\u2019s most extravagant experiment in corporate welfare dulled Japan Inc.\u2019s appetite for risk. CEOs had fewer incentives to restructure, innovate, or lead the next technological wave when they could simply ride the liquidity tide. And at this point, it\u2019s impossible to call Takaichi\u2019s government \u201cearly days.\u201d<\/p>\n Two hundred and fifty days in office should be enough time to demonstrate at least modest progress. Ask Japan specialists to name even a minor Takaichi accomplishment and you mostly get silence. She may get along with<\/a> Trump well enough, but his tariffs and the Iran-war energy shock make clear that good graces don\u2019t come with exemptions.<\/p>\n The deeper problem is that Takaichi arrived with no new ideas for lifting Japan\u2019s economic game just as China seizes the global auto industry and the artificial intelligence frontier. Her plan was to dust off the playbook of her mentor, former Prime Minister Shinzo Abe.<\/p>\n Never mind that Abe\u2019s 2012\u20132020 tenure also leaned heavily on generous BOJ liquidity and a sliding yen. Takaichi is wagering that the same strategy will somehow deliver different results this time. That leaves her with few levers beyond pressuring the Ueda BOJ to stop tightening.<\/p>\n