The Bank of Japan kept its policy rate unchanged at 0.5% last week, even as inflation remains above the government’s 2% target for the 11th consecutive quarter.
The decision reflected not only concerns about the fragile recovery, but also Prime Minister Takaichi’s dovish stance, which has made further tightening politically difficult.
What looks like prudence is now becoming one of Japan’s biggest inflation risks — widening income inequality and, over time, risking political discord as public frustration builds.
The weak yen has long acted as a tax on households by raising import costs for food, energy, and daily necessities.
In addition to the rising materials and labor costs, the cheap yen and ultra-low interest rates are helping to drive up real estate prices.
The rising asset prices have started to feed into rents and housing costs — a lagging component that accounts for about 21% of Japan’s CPI — and are difficult to reverse once the momentum builds.
The yen, which averaged JPY83 per dollar in FY2012(April 2012 to March 2013), has depreciated by roughly 45% to JPY152 per dollar in FY2024.
The cheaper yen no longer supports domestic employment because many large manufacturers have shifted production overseas. The profits earned by their overseas subsidiaries remain largely abroad, returning only partially as dividends. Ultra-low interest rates and the depreciated yen therefore benefit asset owners and global corporations at the expense of domestically oriented businesses and consumers.
The shift of wealth toward asset holders at the expense of wage earners has been underway for decades, but the pace is accelerating as inflation outpaces income growth. Persistently high inflation without a corresponding rise in real wages erodes household purchasing power and discourages spending.
A modest rate hike could help stabilize inflation by strengthening the yen, lowering import costs, and improving profit margins for domestically oriented industries. It would give real wages a chance to recover before housing inflation becomes entrenched.
Japan is also more resilient to moderately higher rates than often portrayed.
- Real interest rates will remain negative even after a small policy rate increase, keeping financial conditions accommodative.
- Labor shortages are keeping unemployment low, as businesses continue to compete for workers.
- Households are net savers, so higher deposit rates would raise household interest income and support consumption.
- Part of the government’s higher interest expenses would circulate back as tax revenues on those same interest earnings and increased consumption.
- A stronger yen and a mild correction in asset prices would help defuse public resentment over perceptions that foreign investors are driving up real estate prices.
These effects are rarely discussed in the media, which tends to focus narrowly on the potential interest expense burden to the government and borrowers. In reality, the broader impact of modestly higher rates could be net positive for both economic balance and social sentiment.
A rate hike would also allow Governor Ueda to demonstrate the BoJ’s independence from political influence and reaffirm that monetary policy is guided by economic fundamentals, not political convenience.
Prime Minister Sanae Takaichi came to power with the support of the Japan Innovation Party and several independents, leaving her administration without a clear parliamentary majority.
Given her fragile parliamentary position, policy formation under her government is likely to remain issue-driven rather than strictly partisan, with cooperation across party lines depending on the agenda.
Her high public approval ratings have so far enabled her to move forward on key policy priorities but that support rests largely on hopes that she can turn Japan around. If those expectations fade amid elevated inflation and slower wage growth, sustaining political momentum could become more difficult — both across the Diet and within the LDP, where her leadership is still relatively new.
A small rate hike would not threaten Japan’s recovery — it would strengthen it.
Tempering the yen’s slide by raising interest rates would slow imported inflation, ease future housing pressures, and support a fairer distribution of gains between savers, workers, and asset owners — while reaffirming that the BoJ remains independent and credible.
#BankofJapan #JapanEconomy #Inflation #Yen #Takaichi #日本銀行 #日本経済 #円安