The Bank of Japan is unique among developed-market monetary authorities. Just as the European, Canadian, and Swiss central banks start their easing cycles – and the US Federal Reserve and Bank of England prepare to join in – the BOJ is tightening policy across the yield curve.

Yet, the market is sceptical – driving the yen down 20% against the dollar since late-2022. Understandably so, says Medley Advisors’ veteran BOJ-watcher Kenichi Nagura. “The BOJ cannot raise interest rates to 2%, 3% like the Fed or ECB; the Japanese economy is not strong enough to accept such high interest rates,” he says in this podcast. “In the beginning, the rate hikes will be slow but, once BOJ can get a sense of the reaction of the economy and the market and politics to the rate hike, then the BOJ can raise interest rates at a faster pace”.

The underlying problem is that “more than 30% of people are retired, … prefer zero-percent inflation or deflation, and their voting rate is very high” and the scale of Japan’s public debt. “If they can raise interest rates and the inflation rate gradually, then government interest payments will increase gradually … [and] … tax revenue will also increase gradually”.

The Japanese authorities cannot risk losing control of this process.