WHERE AUSTRIAN ECONOMICS MEETS REAL WORLD ACTION

The Bank of Japan calls 1.25% accommodative. Its own inflation measure, stripped of government support measures, is 2.6%. What that gap means for anyone who borrows, prices or buys in yen.

The letter from the bank is one page long, and you read it twice.

Your short-term prime rate goes up on 2 November. So does the rate on the working-capital loan that carries your stock between the order and the payment. It is not the first letter like it.

At the bottom, almost as an afterthought, the branch manager offers to talk about fixing the rate. Fixed is dearer today. Floating is cheaper today, and nobody will tell you what it costs next year.

Before the new rate even takes effect, the people who set the number meet again.

On 18 September the Bank of Japan raised its policy rate by a quarter point to 1.25%, effective 24 September. It is the highest rate since 1995 and the second rise in three months, after a move to 1.0% on 16 June.

The vote was 7–2. Both dissenters wanted to hold. Toichiro Asada pointed to consumer prices excluding fresh food rising by less than 2% in recent months. Ayano Sato said the economy and prices had not picked up enough to justify a rise.

Asada’s number is real. Consumer prices excluding fresh food rose 1.7% in the year to August, the eighth month in a row below the 2% target.

But that figure is being held down by the government. Since March, a subsidy has kept petrol at around ¥170 a litre, and in August Prime Minister Sanae Takaichi extended it with no end date announced. Other energy support measures pull the same way.

The Bank knows this. Since March it has published its own version of the same index with the effects of government measures such as these stripped out. On that measure, prices rose 2.6% in the year to August, up from 2.3% in July. It has been above 2% for almost two years.

Same prices, same month. One reading says inflation is below target. The other says it is above it. The difference is the government.

The case for the Bank’s caution is still a serious one. Japan spent most of three decades with flat or falling prices and near-zero rates. Government debt, central and local, is estimated at about 188% of GDP this fiscal year, so every quarter point on the cost of borrowing lands on the public accounts. A central bank that moved fast could unsettle the bond market it has spent a decade holding up. Two of the nine board members thought even a quarter point was too much.

Take every word of that as true. What follows is unaffected.

The Bank’s own statement says that after the rise, real interest rates “have remained at low levels” and that “accommodative financial conditions are expected to be maintained.” In plain terms: the price of borrowing is still below the rate at which prices are rising.

Bond buying is being cut, but not ended. Monthly purchases are falling by about ¥200 billion each quarter, to about ¥2.1 trillion a month in January to March 2027. In June the Bank decided that from April 2027 the cuts stop, and purchases hold at about ¥2 trillion a month.

The next decision is on 29–30 October, alongside the Bank’s quarterly forecasts. Governor Kazuo Ueda told reporters in September that he would not rule out back-to-back rises or a half-point move.

A second figure to undo the first

Start with the two inflation readings, because they are the whole problem in miniature.

The government holds down the price of petrol. That lowers the official inflation figure. A central bank that sets the price of borrowing by reference to inflation is now reading a gauge the government has already adjusted, so it has had to build a second gauge to undo the first. The majority voted to raise anyway. The two dissenters cited the subsidised number.

A business owner has no second gauge. The price of fuel no longer tells you what fuel costs to supply, and the official inflation figure no longer tells you how fast your costs are really rising. Each number that should carry information has been adjusted by someone else first. Economists call this the calculation problem: the signals people plan with stop telling them what they need to know.

A price set by vote

An interest rate is a price: the price of time. In a free market it is whatever savers and borrowers agree, loan by loan, each free to walk away. In Japan it is set by nine people in a room, and this month they split 7–2.

The objection is not that they set it badly. It is that there is no way to tell. A policy rate is a judgement turned into a number, and no procedure can check it against the rate a free market would have found, because that rate was never allowed to exist.

The market feels the cost of that every month. When the Bank published a summary of its September discussion on 1 October, traders read it as pointing to a rise in December rather than October, and by that day rate markets were pricing about half the chance of an October move they had priced on the Monday.

You can price a rule. You cannot price a discretion.

Slowing the printing is not the same as sound money

The Bank has stopped expanding its bond holdings and is buying less each quarter. That is real, and it deserves credit. But the plan from April 2027 is not to stop. It is to keep buying about ¥2 trillion of government bonds a month, with no end date.

Without a central bank buyer, the government would have to borrow from real savers at whatever rate they demanded. With debt near 188% of GDP, that rate would very likely be higher than today’s. The difference is the support still in place.

This is half-done monetary reform. Slowing the printing stops adding to the problem. It does not remove what was built up over decades, and what remains is the intervention not yet unwound, not a failure of markets.

Who got the cheap money

After each of this year’s two rises, Japan’s three largest banks lifted their short-term prime lending rate by a quarter point and their ordinary deposit rate by a tenth of a point. From November, borrowers pay a prime rate of 2.625%. Savers get 0.5%, the most since 1992. For three decades Japanese savers were paid close to nothing for lending, and the cheapest money of all went to the largest borrower of all: the government.

The recovery that was not allowed

When cheap credit has funded businesses that could not survive at a real price of money, the market’s cure is quick and painful. The weak firms fail, and their staff, premises and customers move to firms that can use them. Japan chose the opposite after its bubble burst in 1990. It held rates near zero for a generation and kept many of those firms alive. Economists call capital tied up this way malinvestment, and the long stagnation that followed is what a correction looks like when it is never allowed to finish.

Business failures are now rising fast. Tokyo Shoko Research counted 5,346 in the first half of 2026, the first time above 5,000 in 12 years, and 1,028 in July alone. It is tempting to call that the correction arriving at last. But the firm mainly cites labour shortages and rising costs, not interest bills, so we will not claim the figures prove it. They do show the conditions for it are now in place.

One distinction runs underneath all of this. Prices that fall because businesses have become more productive are healthy; prices that fall because a credit boom has collapsed are not. Japan treated the first as if it were the second.

You do not have to live in Japan to be exposed to this. If you price a contract in yen, buy from a Japanese supplier or carry yen debt, you are dealing with a rate still below the inflation that matters, a bond buyer that has promised not to leave, and a currency that rate rises have done little to strengthen.

This is analysis, not financial or legal advice. Speak to your bank, accountant or adviser before acting on any of it.

The ideal is an interest rate no committee sets. Short of that, there are four steps the Bank and the government could take now.

—        Finish the bond reduction instead of pausing it. Keep cutting purchases past April 2027, to zero, on a published timetable.

—        Let existing holdings run off as they mature, and publish the schedule so the market can price it.

—        End the fuel subsidy on a dated, published path, so the official inflation figure shows what energy really costs and the Bank no longer needs a second one.

—        Replace meeting-by-meeting judgement with a published rule for how the rate will respond, so businesses can plan against something they can read.

The test of intent is simple. The Bank says financial conditions are accommodative, and its own inflation measure is above target. If the aim is a normal interest rate, there is no reason to commit to buying ¥2 trillion of government bonds a month with no end date.

That commitment is the tell.

Stay free,

Jean-Pierre

The Austrian Actor

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