It has been a year and two months since my last post. While I’ve had much to say, my natural tendency toward procrastination combined with professional obligations caused this long silence. It is, to say the least, regrettable.
Today’s theme is monetary policy. I used to hold Governor Ueda in high regard, influenced by a brilliant and broad-minded economist whom I deeply respect (though I will withhold their name). I believed Ueda was highly capable and that a gradual hike in interest rates was inevitable as we approached our inflation targets. However, witnessing repeated monetary tightening while the public struggles with extreme financial hardship has been a wake-up call for me. The world is currently in a frenzy over “Trump Tariffs,” but regardless of those tariffs, the Bank of Japan’s (BoJ) current trajectory is profoundly problematic.
A Premature Pivot
In my post from January 29, 2024 (“Real Wages as a Top-Tier Metric”), I argued that real wages were the most critical indicator and that the BoJ was likely waiting cautiously to see if they would turn positive at some point in fiscal 2024. Instead, the BoJ has since hiked rates three times: March 2024 (ending negative rates), July 2024, and January 2025.
Yet, look at the actual data for real wages. While we saw occasional positive blips in a single month, the preliminary data for February 2025 shows a year-on-year drop of -1.2%, with “scheduled cash earnings” plummeting by -2.5%. As the daily lives of citizens become increasingly difficult, the BoJ has persisted in cooling the economy. Monetary policy is meant to be forward-looking, but they have clearly misread the room. It is baffling why they are so desperate to preempt inflation at the cost of sabotaging the recovery. Why couldn’t they wait until real wages were firmly in the green? And now, we are hit with the Trump Tariffs. The BoJ should admit its mistake and cut rates, but I don’t expect them to do so.
The Obsession with “2%”
There is a more fundamental issue: why is the 2% inflation target still set in stone? This target was introduced in 2013 under the second Abe administration to combat entrenched deflation. The current era—driven by post-pandemic global price surges and a weak yen—is an entirely different beast. The target should have been revised, especially once global inflation became obvious during the Kishida administration. Because it wasn’t, the “2%” figure has taken on a life of its own, allowing the BoJ to take the detached stance of: “We’re just following the 2% mandate.”
For instance, they could have stated: “While our long-term CPI target remains 2%, our immediate priority is ensuring real wage growth; therefore, we will tolerate a temporary spike in inflation of up to 5%.” Furthermore, if fiscal policy had been deployed in tandem with such a target, we could have boosted domestic demand while eventually raising rates, which would have strengthened the yen.
Post-Abe administrations seem to have failed to analyze why the Japanese economy has stagnated for so long, what Abe tried to do about it, and how to evaluate those efforts. Instead, they seem to have defaulted to a simplistic and flawed logic: “Abenomics was a failure; let’s just raise interest rates.” There is no school of economics anywhere in the world that suggests raising interest rates is a recipe for improving a struggling economy.
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