With the yen recently falling to 40-year lows, a key question is what will force the Bank of Japan to become more aggressive. It is unlikely to be the weak yen or even rising consumer prices. Instead, home affordability and residential property inflation — and their impact on social stability — are more likely to trigger a faster pace of rate hikes.

The BOJ has a history of acting as a “bubble buster.” A few months before Yasushi Mieno became governor in December 1989, he warned that asset inflation was creating dangerous social imbalances. A new graduate joining a top Japanese company, he argued, could no longer afford a home within a reasonable commuting distance. That, he believed, was unsustainable.

He acted on that view. The BOJ raised the official discount rate from 3.75% to 6% in just nine months. Ten-year Japanese government bond yields climbed to 8.3% by September 1990 — months after the Nikkei peaked just below 40,000.

Mieno is often criticized for doing too little,........

© The Japan Times