The Bank of Japan, that most peculiar of central banks, has done the unthinkable: it has raised interest rates to their highest level in 31 years. Yes, you read that correctly. Thirty-one years. A generation. A span of time so long that it encompasses the collapse of the Soviet Union, the birth of the internet, and the slow, agonising decline of Japanese economic hegemony. And what, pray, does this tell us about the state of the world? Very little that is comforting.
For years, Japan has been the sick man of the developed world, a cautionary tale of deflation, demographic decline, and monetary policy so loose it might as well have been non-existent. And now, like a patient who has suddenly awakened from a coma, the BOJ has decided to tighten. But this is not a sign of health. This is a fever. The yen, already battered by the carry trade, is now facing the cold reality of higher rates. The question is: why now? The answer, as with most things, lies in the realm of political economy. The Japanese government, saddled with a debt-to-GDP ratio that would make a Greek finance minister weep, needs higher rates to prevent the complete collapse of its bond market. Inflation, long absent, has finally arrived, and with it the spectre of wage-price spirals.
And what of sterling? The pound, that perennial currency of empire, has strengthened against the yen. The UK economy, we are told, remains resilient. Resilient. What a word. It conjures images of Churchillian stoicism or Victorian grit. In truth, it means that the UK has not yet collapsed into the abyss of hyperinflation or sovereign default. A low bar, but one that is increasingly worthy of applause in the current climate. The Bank of England, ever cautious, has held its nerve while the BOJ panics. The result is a stronger pound, a weaker yen, and a comfortable sense of superiority for British observers.
But let us not kid ourselves. This is not a triumph of British economic management. It is a relative decline that happens to be less precipitous than that of others. The structural problems of the UK economy: low productivity, creaking infrastructure, the relentless march of bureaucracy, remain untouched. The sterling’s strength is a mirage, a temporary reprieve before the next crisis. The real lesson of Japan’s rate hike is that even the most cautious, most deflation-prone economies can be jolted into action by the forces of global inflation. And if Japan can be jolted, so can we.
The intellectual decadence of our time lies in the belief that central banks can manage economies with the precision of a Swiss watchmaker. They cannot. They are blundering giants, reacting to events with lagging indicators and outdated models. The rate hike in Japan is a reminder that the era of cheap money is ending, and that the hangover will be severe. For the UK, the challenge is to avoid the same trap of complacency that ensnared Japan. We must invest, reform, and prepare for a world where rates are not zero. Or we will find ourselves, thirty years hence, the object of some future columnist’s scorn.
The sun is setting on Japan’s economic experiment. But it is also setting on ours. The only question is how long we have before dusk turns to night.
