The Bank of Japan just raised interest rates to the highest level in three decades. Rather than celebrate that milestone as a comeback for an economy that wrestled with deflation and sluggish growth for a generation, Governor Kazuo Ueda would prefer that you focus on how low they still are. So much so that the bank indicated there’s plenty of scope for additional increases.
Much depends on his next move, and how quickly he does it. It’s true that borrowing costs, even after four increases since early last year, remain very low relative to other large economies. Friday’s lift took the main rate to 0.75%. The gap is especially big with the US, which has often been cited as a source of weakness for the yen. Ueda is reluctant to call the hikes a tightening; he emphasizes that policy remains accommodative.
We’ve seen him talk a good game in the past, only to walk it back in response to market reaction or political blowback. Almost from the moment he was appointed in 2023, Ueda wanted to be done with the era of uber-stimulus when rates were pushed below zero and quantitative easing was dramatically expanded. But he’s proceeded with caution. It’s easy to imagine a scenario where the latest move didn’t happen at all. Back in May, with markets reeling from the tariffs imposed by US President Donald Trump and the prospect of a sharp global economic slowdown, the BOJ chief sent a dour message: Further hikes would have to clear a very high bar. (Turmoil within the ruling political party also, at least initially, dimmed the outlook for tightening.)
On Friday, Ueda reversed course. Cautious language added in May — that the bank must judge “without any preconceptions” if its inflation target would ever be met at all — was eliminated. Now, the bank believes that it’s “highly likely” that both prices and wages will continue to rise, and has reverted to its pre-Trump stance that signaled it was on a path to hike — and hike again.
That the bank was able to again nudge up borrowing costs says a lot about Ueda’s strategy. This has been a monetary cycle defined by gradualism and pragmatism. He rejects the fireworks and penchant for surprise that characterized his predecessor Haruhiko Kuroda. Ueda sees little value in shocking markets to ram home a message. With inflation comfortably above zero but not surging, and growth fairly lackluster, a shock isn’t necessary. (So safe does Ueda like to play it that every increase has been leaked to the media, sometimes in great detail.)
The BOJ isn’t the only authority to have trouble locating neutral. It’s a question driving much of the debate at the Federal Reserve over how much to lower rates, and how quickly. The soul searching won’t be over soon, if ever. But it suits Ueda that it remains unresolved. If Ueda indicates that the happy point has moved higher, several more hikes are in the cards. He won’t want his room to maneuver to be so constrained. A quarter-point step every six months or so through early 2027 is a plausible scenario.
