Bank of Japan Signals More Rate Hikes After Breaking Deflation Era

Source: Coindoo Original Title: Bank of Japan Signals More Rate Hikes After Breaking Deflation Era Original Link: https://coindoo.com/bank-of-japan-signals-more-rate-hikes-after-breaking-deflation-era/

Japan’s long experiment with ultra-low interest rates is starting to look less permanent. Rather than focusing on the timing of the next policy move, Kazuo Ueda used his latest public appearance to outline why the country’s economic foundations now look fundamentally different from the past. His message was clear: the ingredients for sustained inflation are no longer theoretical.

For decades, Japan’s central bank worried that any burst of inflation would quickly fade. Ueda now argues that risk is diminishing. Companies, he said, are behaving differently – raising wages more consistently and adjusting prices with less hesitation as labor shortages intensify.

Key Takeaways

• Japan’s economy is moving away from decades of flat wages and prices.
• The Bank of Japan sees conditions for sustained inflation strengthening.
• Interest rates are no longer considered restrictive and could rise further.
• Yen weakness and political pressure may influence the timing of future hikes.

That behavioral change matters more than any single inflation print. It suggests a self-reinforcing cycle may be forming, one where higher wages support spending and allow businesses to maintain price increases without choking demand.

Why higher rates are still likely

Japan’s policy rate may already be at its highest level since the 1990s, but Ueda signaled that monetary conditions remain far from restrictive. Real interest rates are still deeply negative, meaning financial conditions continue to support growth rather than restrain it.

Because of that, additional tightening remains a realistic option if economic projections hold. Many market observers now expect the central bank to continue with gradual, well-spaced hikes rather than a one-off adjustment.

The yen problem complicates the picture

Currency dynamics are adding another layer of pressure. Recent yen weakness has drawn attention from government officials, with concerns that a softer currency could further lift import prices and prolong inflation.

Some analysts argue that persistent depreciation could force the central bank’s hand sooner than expected, especially if it begins to feed directly into household costs.

Politics, wages, and voter pressure

Inflation is not just a monetary issue – it has become a political one. Prime Minister Sanae Takaichi is under growing pressure to address falling real wages, which have weighed heavily on households despite nominal pay increases.

At the business gathering, Takaichi urged corporate leaders to raise wages faster than prices, acknowledging that cost-of-living concerns have already translated into electoral setbacks for her party.

A break from Japan’s old economic identity

Ueda’s most striking observation was not about interest rates at all. He suggested Japan is finally moving away from the “zero-change” economy that defined much of the past generation – an environment where prices barely moved and wages stagnated.

With inflation expectations rising and companies more willing to pass on costs, the risk of sliding back into that pattern appears to be fading. If that assessment proves correct, Japan’s monetary policy debate in 2026 may no longer be about whether rates should rise, but how far normalization can realistically go.