Kazuo Ueda, governor of the Bank of Japan (BOJ).<\/p>\n
Toru Hanai\/Bloomberg <\/p>\n
Japan has lived with zero interest rates for 27 years. Last month\u2019s move to 1% was meant to mark the start of normalization. This week will reveal whether it was also the end.<\/p>\n
Friday\u2019s Bank of Japan decision is shaping up to be the most consequential moment of Governor Kazuo Ueda\u2019s tenure \u2014 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\u2011year high<\/a> in June, Ueda\u2019s team has repeatedly let opportunities to move decisively away from zero slip by.<\/p>\n The alternative is the road Japan has long avoided \u2014 a faster, steadier tightening cycle, political pressure notwithstanding. The rationale is straightforward: more than a quarter\u2011century of ultra\u2011easy policy and corporate coddling has left Japan weaker, not stronger.<\/p>\n Japan Inc. faces a basic contradiction. If Asia\u2019s second\u2011largest economy is truly \u201cback,\u201d as Prime Minister Sanae Takaichi\u2019s government insists, why does it still need perpetual monetary life support?<\/p>\n Whatever growth Japan musters each year owes much to an extraordinary 25\u2011year 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 \u2014 and all eventually exited. Japan alone remains stuck.<\/p>\n Recently, Ueda\u2019s BOJ has quietly eased off quantitative tightening (QT), for reasons that extend beyond economics. One is simple caution: Tokyo\u2019s political establishment still favors cheap money<\/a> and a weak yen. Another is geopolitical volatility \u2014 with President Trump escalating his trade war and conflict intensifying in the Middle East, the BOJ is wary of withdrawing stimulus too abruptly.<\/p>\n Being blamed for Japan\u2019s next recession or scuttling the Nikkei 225 Stock Average\u2019s greatest bull run since the 1980s is the last thing Team Ueda wants.<\/p>\n The coming days may determine whether Ueda\u2019s BOJ is remembered as the team that finally ended Japan\u2019s deflation\u2011era policies \u2014 or the latest to yield to political pressure. The precedent is clear: in 2006\u20132007, 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\u2011the\u2011clock liquidity.<\/p>\n