Is the Japanese Low Inflation–Low Interest Rate Model at an End?

The macroeconomic situation in Japan seems to be coming to a head. When the Bank of Japan, under its President Haruhiko Kuroda, announced on December 20, 2022, that it would raise its interest rate ceiling on ten-year Japanese government bonds from 0.25 percent to 0.50 percent, share prices in Tokyo plummeted and the Japanese yen appreciated sharply. The “Kuroda shock,” which in the eyes of some observers heralded a turning point in Japan’s thirty-year low, zero, and negative interest rate policy, sent shock waves through the international financial markets. Meanwhile, the markets are betting against the Bank of Japan being able to keep its self-imposed interest rate ceiling. Is Japan heralding an end to low inflation and low interest rates? Prof. Dr. Thomas Mayer and Prof. Dr. Gunther Schnabl have examined the Japanese model and see some evidence for this.