BOJ’s Rate Hike: A Turning Point for Japan?
When the Bank of Japan (BOJ) finally decided to move its policy rate from a negative mood – yes, we were talking –0.1% – to a positive one, it felt like the economy got a pep talk it had been missing for ages. It’s not just a tick on the chart; it’s a fresh cue that Japan may have finally rolled past its “lost decade” blues.
From Negative to Positive – Why It Matters
- Deflation’s “de‑escalation”: For years, yen‑baked prices made people and firms hold onto money, hoping it’d be cheaper later. The BOJ’s new stance gives a nudge: “Buy now, on the house!”
- Wage wind‑up: The spring pay (shunto) round brought a 5.28% bump for big companies – the highest level in 33 years. That’s enough to object that “inflation” can actually feel like a good thing.
- Confidence reset: Firms are less scared and can now plan hires, expansions, and marketing without fearing the silent partner that’s deflation.
Background: The Lost Decades I Witnessed
Picture this: Tokyo in the early ’90s, a city that felt “almost crazy” and a market that flirted with the bear’s swagger. I, as the chief economist at DKB International, saw the notorious bubble burst, watched land prices tumble for a staggering 25 years, and even witnessed the Yamaichi Securities collapse in ’97 – a titan that once sat on the global stage.
All the champagne and cheers fell away, replaced by a gloomy echo that “next time will be better,” only to see that hope dampen like mist on a spring morning. It was a long stretch of pessimism, until, recently, there were hints – like a glimmer of sunrise – that recovery might finally be on the horizon.
“The Gloom Goes to Dusk” – Rolling out the Facts
- Business confidence climbs: More companies are feeling good enough to invest and hire.
- Profit margins tighten: With deflation out of the picture, firms can focus on profit rather than delaying purchases.
- Debt worry? Less so: Years of soaring debt have always been a distant threat, but the new inflation direction gives a reassuring shake.
2012 Onwards – Abenomics and the Japanese Dream
After the 2012 election, we saw Prime Minister Abe drop the “Abenomics” flag: a combo of reforms, fiscal boost, and monetary easing. In 2013, he rattled the chandelier with Quantitative and Qualitative Easing (QQE), and by 2016, the BOJ slipped into negative rates again – all with the goal of pushing the economy over its sluggish feel.
Why the 17‑Year Gap Rocks the Bank
It’s times like this, where the BOJ changes its rate for the first time in 17 years (since 2007), that history has a feel‑good vibe. Moving from a shaky, negative “—0.1%” to a stable, “+0.1%” might seem like a tiny tug for the central bank, but it has the potential to be a giant leap for Japan’s businesses and the everyday consumer.
We’re looking at an aging, shrinking population with a natural slowdown—but the BOJ’s message is: “Deflation? Not on our watch.”
What Happens Next? The Upcoming Moves
- Yield curve control? Gone. It’s no longer keeping 10‑year yields hovering near 0%. Instead, the BOJ will open the door for a gradual policy normalisation.
- Asset buying: the new game plan – while the BOJ will still purchase significant government bonds, it will step back from risk‑asset purchases, like ETFs and REITs.
- Gradual exit – the BOJ will maintain its looseness but will slowly trim its gigantic balance sheet. The bargain is to avoid shattering the bond market or spiking yields.
Yields and the Yen: The Two Sides of the Story
With the BOJ now holding a colossal 574 trillion yen (~54% of the JGB total), it has to slim down delicately. We anticipate a modest rise in yields, aiming to keep the bond market anchored without jarring investors.
Meanwhile, the yen has been weakening, partly because other big central banks (e.g., the US) tightened policy. Historically, the BOJ has intervened at around 150 yen per dollar – more of a pause button than a “hold that level forever” move.
And the Bottom-Line?
- Going forward, the BOJ’s policy moves will be data‑driven, mirroring what other major central banks do.
- Rates will gradually climb – but only when the economic picture says so. No surprise jumps, no drastic surprises.
- We’re in a new chapter where the BOJ’s approach is world‑class, strongly grounded in reality, and nothing short of a soft reboot.
So, Japan’s long journey up the hill continues, and the BOJ’s new direction is the wind that helps lift the car up the slope. Let’s watch closely, keep the optimism alive, and see where this interesting ride leads us next.
