Friends who have just followed Japan's interest rate hike will likely be misled by the term 'interest rate hike,' subconsciously thinking that Japan is about to enter a tightening mode and fully withdraw liquidity. However, after reading the comments from the Governor of the Bank of Japan, it becomes clear that there is only one core signal: this interest rate hike is not a 'shift towards tightening,' but merely a small step towards normalizing monetary policy, with no relation to aggressive interest rate hikes.
To understand this signal, one must first grasp the underlying tone of Japan's monetary policy over the past few decades. Since the asset bubble burst in the 1990s, Japan has entered a nearly thirty-year period of ultra-loose monetary policy, transitioning from zero interest rates to negative interest rates, and then to quantitative and qualitative easing (QQE), making it a 'testbed' for unconventional monetary policy globally. During this time, the Bank of Japan has been battling deflation, continuously intensifying its policy measures, gradually reaching an 'extremely large-scale' easing state.
This rate hike is essentially a slight shift from this 'extreme state' towards a normal track. The governor repeatedly emphasizes the 'normalization pace', which is quite clear: there will not be continuous large rate hikes in the future, and policy adjustments will be gradual. The reason for taking this step now is primarily because Japan's inflation has been above the 2% target for 44 consecutive months, and wage increases have formed an endogenous inflation pattern, finally providing a basis for exiting ultra-loose monetary policy.
So don't over-interpret, Japan doesn't intend to 'slam on the brakes', it just wants to slowly return to a normal monetary policy state.
