Kazuo Ueda, governor of the Bank of Japan (BOJ).
Toru Hanai/Bloomberg
Japan has lived with zero interest rates for 27 years. Last month’s move to 1% was meant to mark the start of normalization. This week will reveal whether it was also the end.
Friday’s Bank of Japan decision is shaping up to be the most consequential moment of Governor Kazuo Ueda’s tenure — and a defining fork in the economic path. One route is familiar: the BOJ pauses further tightening for the rest of the year. Even though the BOJ lifted rates to a 31‑year high in June, Ueda’s team has repeatedly let opportunities to move decisively away from zero slip by.
The alternative is the road Japan has long avoided — a faster, steadier tightening cycle, political pressure notwithstanding. The rationale is straightforward: more than a quarter‑century of ultra‑easy policy and corporate coddling has left Japan weaker, not stronger.
Japan Inc. faces a basic contradiction. If Asia’s second‑largest economy is truly “back,” as Prime Minister Sanae Takaichi’s government insists, why does it still need perpetual monetary life support?
Whatever growth Japan musters each year owes much to an extraordinary 25‑year stretch of quantitative easing. The BOJ pioneered quantitative easing (QE) in 2001 and remains the only major central bank that never escaped it. The Federal Reserve, European Central Bank and Bank of England all launched QE after the 2008 crisis — and all eventually exited. Japan alone remains stuck.
Recently, Ueda’s BOJ has quietly eased off quantitative tightening (QT), for reasons that extend beyond economics. One is simple caution: Tokyo’s political establishment still favors cheap money and a weak yen. Another is geopolitical volatility — with President Trump escalating his trade war and conflict intensifying in the Middle East, the BOJ is wary of withdrawing stimulus too abruptly.
Being blamed for Japan’s next recession or scuttling the Nikkei 225 Stock Average’s greatest bull run since the 1980s is the last thing Team Ueda wants.
The coming days may determine whether Ueda’s BOJ is remembered as the team that finally ended Japan’s deflation‑era policies — or the latest to yield to political pressure. The precedent is clear: in 2006–2007, Governor Toshihiko Fukui managed to lift rates only to 0.5% and end QE. After his term ended in 2008, the BOJ quickly returned to zero and revived QE. In the years that followed, it expanded QE rather than weaning Japan off round‑the‑clock liquidity.
Had the BOJ held firm at 0.5% — and continued hiking — Japan’s $4.3 trillion economy might look very different today. It might be more innovative, productive, and competitive. It might be leading the electric‑vehicle transition instead of watching China dominate the future of autos. It might be shaping Asia’s artificial intelligence boom rather than observing from the sidelines.
Japanese officials bristle at the notion that their economy is viewed globally as a cautionary tale rather than a competitive force. A more assertive BOJ could help rewrite that narrative. It would also force the government and corporate Japan to restructure, innovate and increase productivity.
A stronger yen would signal confidence to investors and reduce Japan’s reliance on imported inflation — the “bad” kind driven by elevated energy prices and an undervalued currency.
The question now is whether the BOJ will surprise markets by choosing the less‑traveled path and ending its era of unlimited liquidity. Ueda would be wise to do so. Acting as a never-closing ATM or allowing the yen to remain at 40-year lows hasn’t revived Japan’s animal spirits in 27 years. It’s time to pull away the punchbowl — and quickly.