Bank of Japan Approaches a Rate Decision Squeezed Between Tokyo and Washington

The Bank of Japan meets on September 17 and 18 facing a decision the Financial Times describes as pivotal for Governor Kazuo Ueda, who is managing competing demands from the Japanese government and from Washington. Ueda has said the board will decide with upside risks to prices in mind, language markets read as preparation for a rate increase from the current 1 percent policy rate.

The currency has already moved. The yen strengthened more than 2 percent and touched 155.28 per dollar at the start of September, as traders weighed both the prospect of higher rates and the chance of further official intervention. Board member Hajime Takata has argued the bank should raise rates without delay, and that it could move faster or in larger steps than its recent twice-yearly pace.

Domestic politics complicates the timing. Jiji Press reports that the governing Liberal Democratic Party is reshuffling its cabinet, appointing a new Diet affairs chief and arranging for the secretary-general of the Japan Innovation Party to enter the cabinet. A coalition still managing its own formation rarely welcomes higher mortgage and borrowing costs.

Japan's situation is the clearest case of what decades of suppressed interest rates produce. The government is the largest debtor in its own bond market, and every increase in the policy rate raises its interest bill directly. Currency intervention addresses the immediate exchange-rate move, not its underlying cause. Only the interest-rate gap with the United States changes that underlying pressure, and closing it is costly in a way that falls on the Japanese state itself.