Bank of Japan has no choice but to hike rates now. But at what cost?

Japan is staring down the barrel of an economic mess, and the Bank of Japan can’t stall any longer. The central bank has no real option left but to raise interest rates—again.

The weak yen has wiped out purchasing power across the country, driven up living costs, and left millions struggling to keep up. That’s the brutal backdrop veteran ruling party lawmaker Taro Kono laid out on Tuesday, according to Reuters, as he demanded both tighter monetary policy and fiscal discipline to stop the damage.

The BOJ had already pulled the plug on its decade-long stimulus experiment last year and bumped short-term interest rates up to 0.5% in January. But Kono, who’s gunning for the top job himself, says it hasn’t been enough. He warned that Japan can’t afford to let real borrowing costs—already negative thanks to high inflation—linger in the red.

“I think it’s better to start early,” Kono said, pressing for more rate hikes. He added that the BOJ needs to “send out a message that Japan will pull out of a situation where real interest rates are negative.” When asked if a hike could come before year-end, he kept it vague but blunt: “I feel like [rate hikes] have already come too late.”

Weak yen keeps crushing Japanese households

Consumer prices in Japan have stayed above the 2% mark for over three years straight. But Governor Kazuo Ueda is still dragging his feet on raising rates further, citing pressure on the economy from U.S. tariffs—coming from Washington under President Donald Trump’s new administration.

While the BOJ continues to hesitate, critics say the damage is already deep. Kono argued that the BOJ’s delay has weakened the yen and blown up import costs, creating a wave of inflation that’s hitting pensioners and businesses hard. What used to help exporters is now wrecking bottom lines.

The cheap yen that once gave Japan’s export-heavy economy an edge has turned into a liability. Kono called it the “root cause of crippling inflation,” adding that it’s “eroding corporate margins and hurting pensioners.”

With domestic production costs rising and imported goods draining company budgets, he said it’s time to move past the old economic playbook. That means ditching Abenomics—the blend of ultra-loose policy and big government spending introduced by former Prime Minister Shinzo Abe back in 2013 to fight off deflation.

“The BOJ should gradually raise interest rates, while the government should restore fiscal health under a new accord that replaces ‘Abenomics’,” Kono said.

BOJ and government face pressure from business and inside the party

Business leaders aren’t sitting quiet either. Takeshi Niinami, who chairs the Japan Association of Corporate Executives, said the central bank is dangerously close to falling behind the curve.

“I understand that the BOJ is in a very difficult position,” Niinami said last month, “but the bank should know that it will fall too much behind the curve if it doesn’t make a move.” His solution? Strengthen the yen. “The best step to combat rising living costs would be to reverse the weak yen and seek a somewhat stronger yen,” he said.

Across Japan, the political pressure is rising too. While Kono failed in his 2024 bid to lead the Liberal Democratic Party, the party’s brutal loss in last month’s upper house election has reignited talk of a leadership shake-up.

Current Prime Minister Shigeru Ishiba, who beat Kono last year, is now facing calls from within the party to step down. Senior LDP members are already pushing for a new leadership vote, adding more heat to an already volatile situation.

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