How to Read the Nikkei Editorial “The BOJ Should Ensure Sufficient Dialogue on the Path of Continued Rate Hikes”

 

How to Read the Nikkei Editorial “The BOJ Should Ensure Sufficient Dialogue on the Path of Continued Rate Hikes”

 

This morning’s Nikkei editorial evaluated the Bank of Japan’s decision to raise the policy rate to 0.75% as “appropriate” and called for deeper communication with markets as normalization proceeds.
While the argument is relatively coherent, it falls short when viewed against the structural challenges confronting the Japanese economy.

As I noted in yesterday’s Bloomberg commentary, the BOJ’s latest move may appear to signal monetary normalization, but in substance it remains highly accommodative and insufficient to counter Japan’s entrenched inflationary pressures.

1. Japan’s “Fourfold Burden” and the BOJ’s Delay

Japan is currently facing a fourfold burden:

• demographic decline,
• prolonged stagnation in consumption,
• currency depreciation, and
• accelerating inflation.

Despite this, the BOJ maintains an effectively accommodative stance on the grounds that the 2% inflation target has not been “sustainably achieved.”
Yet achieving price stability requires raising the real policy rate into positive territory—an elementary principle of monetary policy, as emphasized by the Taylor rule.

2. The BOJ’s Optimism on Inflation and Its Problems

The BOJ repeatedly forecasts that inflation will decelerate.
However, with

• fiscal stimulus and monetary easing proceeding simultaneously,
• persistent yen depreciation, and
• elevated food prices,

there is little basis for expecting disinflation.
In particular, the BOJ’s assumption of disinflation in food prices is inconsistent with current data.
Given the BOJ’s limited track record in accurately forecasting inflation, greater caution is warranted.

3. What the Data Show: Inflation Is Accelerating, Not Slowing

Since April 2022, Japan’s inflation rate has exceeded 2% for 44 consecutive months.
The latest nationwide core CPI for November shows:

• +3.0% year-on-year,
• +0.4% month-on-month (annualized +4.9%).

Rice prices have surged even more sharply:

• +37.1% year-on-year,
• +1.9% month-on-month (annualized +25.3%).

The BOJ’s expectation that food inflation will ease toward year-end has already lost credibility.

4. The Gap with the Neutral Rate: Policy Is Still Far Too Loose

Both the government and the BOJ estimate:

• an inflation objective of 2%, and
• a potential growth rate of 0.6%.

This implies a nominal neutral rate of roughly 2.6%.
With the policy rate at 0.75%, the gap is nearly 2 percentage points, meaning policy remains highly accommodative.
Even with 0.25% hikes at each meeting, normalization would take more than a year.

5. Fiscal Policy Is Amplifying the Risk

Compounding the problem is the government’s fiscal stance—what I refer to as “Sanaenomics”—which entails fiscal spending of roughly 3% of GDP.
Under 3% inflation, such large-scale fiscal expansion amplifies both demand and prices, making overheating almost inevitable.

If this continues,
the combination of currency depreciation, inflation, and asset-price excesses could push Japan into an uncontrollable crisis.

6. What Japan Needs Is Not “Dialogue” but a Clear Policy Mix

To restore economic stability, Japan needs a concrete policy package:

• a phased increase in the policy rate to exceed the inflation rate, and
• a permanent reduction of the consumption tax to 5% to offset the risks of higher rates and yen appreciation.

Abstract calls for “dialogue” or “fiscal discipline” are insufficient to avert what could become the most serious economic crisis of the postwar era.

7. The Limits of the Nikkei Editorial

The Nikkei editorial rightly notes the need for continued rate hikes, market communication, and fiscal discipline.
However, it does not fully grasp the severity of Japan’s structural challenges or the extent of policy delay.

Japan’s risks are not merely a matter of “rate hike pace.”
They stem from a structural crisis in which monetary, fiscal, and exchange-rate dynamics are tightly intertwined.

Conclusion

What Japan needs now is:

• a clear path toward monetary normalization,
• policy rates aligned with the neutral rate,
• coherence between fiscal and monetary policy, and
• realistic decision-making based on the persistence of inflation.

It is not abstract “dialogue” but a concrete, credible, and executable policy package that is essential for Japan’s economic revival.

T.N.