The Revolt of the Neutral Rate: Why 2025 Marks a Global Turning Point

 

The Revolt of the Neutral Rate: Why 2025 Marks a Global Turning Point

Since the autumn of 2025, the global economy has been enveloped in an uncanny calm.

Equity markets continue to break record highs.
Unemployment rates remain pinned near historic lows.
 

Central banks repeat the phrase “soft landing” with ritualistic confidence,
and markets, almost gratefully, accept the reassurance.

 

Yet beneath this surface tranquility lies the unmistakable tremor of a tectonic shift.

In the United States, nominal GDP growth has surged above an annualized 8 percent.
Real growth has returned to the 4 percent range.
The labor market is overheating once again.
 

Inflation, after a brief period of moderation, is re-accelerating.
Wage growth remains stubbornly strong,
and corporate pricing power has only intensified.

 

Despite this, the federal funds rate sits at 3.75 percent.
The Federal Reserve continues to cling to its long‑standing estimate
that the neutral rate lies somewhere between 2.5 and 3 percent.
 

Markets, too, have embraced this outdated assumption.

But nominal GDP growth and nominal policy rates
have always moved in the same direction.

This is not merely an empirical regularity.
It is a gravitational law of macroeconomics.

In a world where nominal growth exceeds 8 percent,
a policy rate stuck at 3–4 percent is fundamentally inconsistent.
 

The gap will inevitably close—
and such corrections never occur gently.
They arrive suddenly, violently, and without warning.

History offers three clear precedents:

• In the 1970s, the Fed underestimated the neutral rate
  and allowed inflation expectations to spiral out of control.

• In 1994, a misalignment between the Fed’s view
  and the market’s perception of the neutral rate
  triggered a bond market massacre.

• In 2021–22, the Fed misread inflation as “transitory,”
  and was forced into a rapid tightening cycle.

Now, as we approach the end of 2025,
the world is preparing to repeat the same mistake.

 

But this time, the epicenter is not the United States.
It is Japan.

 

For nearly three decades, the Bank of Japan has adhered to a narrative that
“Japan’s neutral rate is near zero”
and that “low growth and low inflation are Japan’s destiny.”
 

This belief has hardened into institutional dogma.

Yet if the world’s neutral rate rises,
Japan cannot remain an island of zero interest rates.

Pressure will come from abroad.
Japan’s rates will be forced upward.

If the BOJ is compelled to raise rates by a cumulative 2 percent,
Japan’s effective equity duration—roughly 30 years—
implies a simple and brutal arithmetic:

A 2 percent rise in rates
→ a 60 percent decline in equity valuations
→ the Nikkei falling from 50,000 into the 20,000s.

 

This is not merely a market correction.
It is a moment that will test Japan’s financial system,
its fiscal architecture, its corporate governance,
and the nation’s collective belief in the future.

 

The “revolt of the neutral rate”
marks a structural turning point for both the United States and Japan.
It is unavoidable.

 

Yet the coming crash should not be feared.
It represents the long‑delayed exposure of distortions
that have accumulated over decades—
a necessary rite of passage toward a new equilibrium.

 

For Japan to reclaim its future,
it must understand this shock clearly
and move decisively beyond it.

 

There is only one path forward:

Accelerate monetary normalization,
permanently reduce the consumption tax to 5 percent,
and ultimately abolish it.

 

Only by removing these two anchors—
the illusion of permanently low interest rates
and the dependence on consumption taxation—
can Japan revive domestic demand,
restore investment dynamism,
and rebuild its faith in the future.

 

The revolt of the neutral rate is not the end.
It is the beginning of Japan’s long‑awaited renewal.