BOJ Wins Unlikely Green Light to Raise Interest Rates

The Bank of Japan (BOJ) has gained unprecedented political support to raise interest rates for the first time in decades. The Liberal Democratic Party, led by Prime Minister Sanae Takaichi, has suddenly switched from opposing rate hikes to giving the BOJ a green light to tighten monetary policy quickly.

This shift follows years of low-interest-rate policies that failed to revive Japan's economy and instead created complacency, imported inflation, and put Tokyo at a disadvantage in competing with China. The weak-yen strategy has also risked provoking a trade war with the US under the Trump administration.

Markets are now pricing in a scenario where the BOJ raises interest rates from 1% to 1.75% by April 2027, with possible hikes in September and December this year. Shigeto Nagai at Oxford Economics expects the BOJ to commit to a steady tightening path through early 2027.

The BOJ's Governor Kazuo Ueda finally has the opportunity to end Tokyo's near-zero-rate era, but he must demonstrate the courage to continue raising interest rates even after the government inevitably reverts to its old habit of relying on low-interest rates to avoid painful reforms.