As Japan’s central bank prepares to meet this week, the architects of the country’s decade-long policy of low interest rates say that strategy has outlived its usefulness. Their concern has flipped from stagnant prices to entrenched inflation.
Japan’s current leader appears unconvinced.
Since taking office last year, Prime Minister Sanae Takaichi has continued to embrace Abenomics, the economic strategy championed by former Prime Minister Shinzo Abe, leaning on the central bank to keep rates low while pursuing record fiscal spending.
Abenomics was conceived in 2012 to jolt Japan back into growth. But the deflationary spiral and strong yen that it was designed to address have reversed. For most of the past four years, inflation has remained above the central bank’s 2 percent target. The yen has fallen against the dollar to multidecade lows.
“The situation is completely different now,” said Koichi Hamada, a former top aide to Mr. Abe and one of the key advisers behind Abenomics. Therefore, he said, “I changed my mind right now to recommend monetary constraint.”
On Friday, the Bank of Japan is widely expected to raise interest rates from 1 percent to 1.25 percent, stepping up its recent pace of quarter-point increases roughly every six months. But Mr. Hamada and others say the central bank should move faster still.
Those in the Takaichi administration who still believe Abenomics is right for Japan may consider his change of heart a betrayal, Mr. Hamada said. But he believes the prime minister should stop pressuring the Bank of Japan and pursuing policies that risk worsening inflation.
Mr. Hamada is not alone.
In 2012, when Treasury Secretary Scott Bessent was a hedge fund manager at George Soros’s firm, he visited Mr. Hamada at Yale University. Mr. Hamada recalls walking Mr. Bessent through his early plans to reinvigorate Japan’s economy.
In a 2022 essay for a financial policy magazine, Mr. Bessent recalled being convinced by the plans. He went on to deploy a profitable investment strategy of shorting the yen and buying Japanese equities, becoming one of the earliest and most successful investors to capitalize on Abenomics.
More recently, Mr. Bessent has pressed Japan to raise interest rates and rein in fiscal spending.
Ms. Takaichi’s spending plans have elevated concerns about Japan’s ability to service its debt. Yields on 10-year government bonds have soared to three-decade highs. Low interest rates have also encouraged capital to leave the country, weakening the yen and creating tensions with the United States.
In July, the yen fell to a four-decade low against the dollar, prompting Japan and the U.S. Treasury Department to intervene jointly in foreign exchange markets. The currency has strengthened somewhat in recent weeks amid expectations that the Bank of Japan will raise rates at its September meeting.
At a news conference earlier this month at the Group of 20 finance meeting in Asheville, N.C., Mr. Bessent said he had urged Japan to abandon its reflationary policies. Abenomics was “a tremendous success,” Mr. Bessent said. But now, Japan “should actually let that run and stop the reflation.”
Haruhiko Kuroda, Japan’s former central bank governor who kept rates at or below zero for a decade, has also recently warned about inflationary pressures from the administration’s spending plans and a weak yen.
Others remain committed to the old approach. Takuji Aida, chief Japan economist at French investment bank Crédit Agricole and an economic adviser to Ms. Takaichi, argues that Japan must keep interest rates low and spend aggressively to spur growth.
A weak yen benefits Japanese exporters competing overseas with low-cost Chinese goods, Mr. Aida and others argue. He says higher import prices for consumers can be partially offset by additional government spending. Mr. Aida did not respond to interview requests.
Satsuki Katayama, Japan’s finance minister, said during the Group of 20 meeting that she had told counterparts that Japan’s fiscal policy “prioritizes growth while balancing it with fiscal sustainability.”
Asked whether any countries had expressed concerns about Japan’s finances, she replied, “Surprisingly, there weren’t any.”
To Motohiro Sato, a professor of public finance at Hitotsubashi University, there is a striking dynamic at play: Abenomics veterans — including Mr. Hamada and Mr. Kuroda — arguing against continuing its policies, while current politicians are “still holding a deflation mind-set.”
During the current surge in energy prices, for example, the Takaichi administration has offered subsidies rather than encouraging conservation, “urging spending out of fear of deflation,” Mr. Sato said. “They are applying deflation remedies to an inflationary era.”
For years, when interest rates were low and prices flat, heavy government spending triggered little alarm, Mr. Sato said. That is no longer the case. “Market pressure is only going to get louder.”
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