Bank Of Japan’s 2026 Just Got A Whole Lot Harder

Rarely has a central bank governor been more annoyed at good inflation news than Japan’s Kazuo Ueda.

When the Bank of Japan head ended 2025, the big question facing Ueda’s board was how many times it would hike rates in the year ahead. Now, the betting is that Team Ueda might not be tightening at all.

There are three reasons for this about-face. One, newish Prime Minister Sanae Takaichi, who’s made it clear it would be “stupid” for the BOJ to continue normalizing rates. Two, inflation in February fell below the 2% target to 1.8%. Three, complete uncertainty about how Donald Trump’s White House might shake up Asia’s markets in the months ahead.

Granted, there’s chatter that the BOJ is determined to hike rates again in short order — perhaps April. In December, the Ueda BOJ raised Japan’s benchmark rate to 0.75%, a 30-year high.

The worry, of course, is that the Ueda board might suffer the same ignominy as the 2006-2008 BOJ. Back then, the central bank ended quantitative easing and hiked rates to 0.5%. But after a mild recession and the “Lehman shock,” the BOJ rushed back to zero rates and reactivated QE.

The odds of Ueda suffering a similar fate are too high for comfort. For one thing, real wages are still lagging inflation. In fact, real wages didn’t rise in a single month last year, decreasing an annualized 1.3%.

This presents a real dilemma for the BOJ. If it hikes rates to, say, 1%, it might be blamed for undermining the virtuous cycle of higher wages and increased domestic spending that Takaichi hopes to trigger this year.

Though the BOJ is technically independent, it often lacks the autonomy enjoyed by the Federal Reserve or the European Central Bank. Really, name another major central bank that would leave rates at, or near, zero for 27 years. Or another that would buy up half the government bond market, become the biggest holder of the nation’s stocks and swell its balance sheet to a size bigger than its entire economy.

The BOJ’s mistake, frankly, was not normalizing rates sooner. From 2013 to 2023, Governor Haruhiko Kuroda passed the baton to Ueda; he could’ve put a rate hike on the scoreboard. Or at least get the quantitative tightening (QT) process going.

Once Ueda took over in April 2023, he waited more than a year to raise rates to 0.25%. In doing so, he squandered an ideal window to kick off QT and normalize rates. Just like Kuroda before him. Now, as Trump’s trade war sledgehammers Asia, China’s deflation deepens and the number of geopolitical threats grows in real time, hiking rates is a much tougher sell to the Tokyo establishment.

It’s not just that the Takaichi government is against rate hikes. It’s that her Liberal Democratic Party plans to reopen the fiscal floodgates in ways that are spooking the bond market. Earlier this year, Japanese 10-year yields rose to the highest since 1999.

Already, Japan has by far the worst debt burden among major economies — about 260% of gross domestic product. Japan is already paying record debt-servicing costs. BOJ rate hikes now could exacerbate the problem just as Takaichi is talking about tax cuts.

It’s never good to hear bond markets buzz about a “Liz Truss moment,” Japanese-style. But this is where Ueda finds himself in early 2026. In 2022, then-UK Prime Minister Truss crashed the bond market with an unfunded tax-cut package.

Might Takaichi be similarly tempting fate? Only time will tell, but it hardly helps that Takaichi’s predecessor, Shigeru Ishiba, said last May that Tokyo’s finances are “worse than Greece.” All this complicates Ueda’s job in tantalizing ways — and in real time. And things might only grow more precarious as the year progresses.