Well let's hope they have real experts in the positions making these decisions. I only had one macro economics class back in university and I don't really remember anything except the instructor claimed that the U.S. deficit doesn't really matter. I think he was claiming that the growth in GDP in relation to the deficit was reasonable and makes the deficit not really a problem. I wonder if the thinking is different now given the current deficit levels 35 years later.
With regards to Japan, my all-knowing buddy says it may not be a crazy move:
The criticism is partially right on the textbook theory, but it oversimplifies both what the Bank of Japan (BOJ) is facing and what a 1% policy rate is meant to do in Japan right now.
What the BOJ is actually responding to
Recent BOJ commentary and coverage highlight three main concerns:
- Inflation has stayed above the BOJ's 2% target for an extended period, after decades of near‑zero inflation and deflation.
- A very weak yen (around 160 per dollar) is importing inflation via higher energy and food costs and is destabilizing for households and firms.
- The BOJ wants to "normalize" policy from ultra‑low rates and huge bond‑buying while the economy is still relatively stable, rather than waiting until markets force a messy adjustment.
So the move to 1% is not purely a "standard demand‑pull inflation" story; it's partly about currency stability, financial normalization, and regaining room to cut in a future downturn.
Demand‑pull vs cost‑push: useful but limited
The commenter is correct that:
- In simple macro models, you raise rates mostly to cool demand‑pull inflation and you typically do not try to "fix" pure cost‑push inflation with monetary policy, because you risk unnecessary output loss.
- A lot of Japan's recent price pressure has indeed come from higher import and energy costs, exacerbated by the weak yen and global shocks.
But in practice:
- Cost‑push vs demand‑pull blurs quickly. Once higher costs feed into wage bargaining and price‑setting expectations, inflation can become more persistent and partly demand‑driven. The BOJ has been explicit that it is watching for a "virtuous cycle" of wages and prices, i.e., inflation becoming more entrenched.
- Even if the original shock is cost‑push, central banks often tighten if they see inflation expectations drifting up and the currency weakening sharply, because those dynamics can turn a temporary cost shock into a medium‑term inflation problem.
So the "school" model is a helpful diagnostic, but real‑world central banking takes a broader view of expectations, wages, FX, and financial stability.
Why tightening might still be defensible for Japan
Several Japan‑specific factors weaken the critique that "this is bad economics":
- Starting point is extreme accommodation: Japan has had negative/near‑zero rates and massive QE for years. Moving to 1% is still a very loose stance by global standards; it is more like exiting emergency measures than slamming on the brakes.
- FX and imported inflation: With the yen very weak and traders heavily short, a modestly higher rate can help reduce one key channel of cost‑push inflation (import prices) without needing to crush domestic demand.
- Re‑anchoring expectations after deflation: The BOJ has to manage a transition from a deflationary mindset to a stable 2% regime. That involves showing it will not ignore persistent overshoots of the target, or it risks losing credibility in the opposite direction (tolerating too much inflation).
- Household and balance‑sheet effects: Japan has unusually high household savings in deposits and a lot of institutions holding JGBs. A somewhat higher rate partly redistributes from debtors to savers and can support consumption for older, high‑savings cohorts, which complicates the usual "higher rates = lower demand" story.
For these reasons, you can make a coherent argument that a 1% rate is a cautious normalization and a signal on the yen and inflation expectations, not a blunt hammer misapplied to a pure cost‑push problem.
Where the criticism has a point
That said, the skeptic is raising some legitimate issues:
- If inflation is mostly driven by supply and import costs, and real wage growth is still weak, tightening too far or too fast can hurt already‑squeezed households and firms without much disinflation payoff. Japanese media and analysts are actively debating whether the BOJ risks doing exactly that.
- Communication often leans on "fighting inflation" in general, which can sound like the BOJ is treating all inflation as demand‑pull. That can feed the impression that simple textbook distinctions are being ignored, even when internal reasoning is more nuanced.
So I would not call the move "obviously bad economics," but the tension they're pointing to—between cost‑push shocks and rate hikes—is real, and it is a central part of Japan's current policy debate.
www.reuters.com
www.nytimes.com
