Japan Takes Another Step Away From Easy Money

The people who work the levers of Japan’s economy are in a bind: The country’s low interest rates, which they have long used to goose growth, are now well out of step with other big economies. Bridging that gap is tricky.

The yen is at a decades-long low against the U.S. dollar, threatening to inflict prolonged inflation on Japan, which for years suffered the opposite problem, deflation. But if policymakers in Tokyo loosened their grip too much and rates rose too high, they could force higher borrowing costs on Japan’s businesses and consumers and cause havoc in financial markets.

On Tuesday, the central bank, the Bank of Japan, tried to thread the needle, announcing a policy that aims to nudge bond yields higher. The bank said it would use 1 percent as a starting point for yields on 10-year government bonds, instead of a cap, saying it expected inflation to go higher than it had previously believed. In July, it had announced it would allow those yields to rise above 0.5 percent, which had been the bank’s ceiling.

The yield on 10-year Japanese government debt responded accordingly on Tuesday, rising to around 0.9 percent.

Decisions by the Bank of Japan reverberate around the world, especially in American markets. Interest rates in the United States are well above Japan’s — yields on 10-year U.S. Treasury notes briefly pushed above 5 percent recently, a level not seen since 2007.

Rates in the United States have jumped since the Federal Reserve, the American central bank, began a sustained effort to tame inflation sparked by an economic resurgence after the coronavirus pandemic. The Fed is expected on Wednesday to stand pat with rates already at a 22-year high.