The Implications of Kono’s BOJ Rate Hike Call for Japanese Equities and Currency Exposure

Japan’s monetary policy crossroads have taken a new turn as Taro Kono, a senior figure in the ruling Liberal Democratic Party (LDP), intensifies calls for the Bank of Japan (BOJ) to accelerate rate hikes. His arguments center on addressing inflationary pressures driven by a weak yen and moving beyond the legacy of Abenomics—a policy framework criticized for prolonging ultra-loose monetary conditions. For investors, the implications of Kono’s push—and the BOJ’s cautious response—demand a strategic reassessment of asset allocations, particularly in equities and currency exposure.

Kono’s Case for Tightening: A Policy Shift in the Making

Kono has positioned himself as a vocal advocate for normalizing Japan’s monetary policy, arguing that the BOJ must “gradually raise interest rates” to counteract negative real rates and stabilize the yen [1]. He frames the weak yen as the “root cause of crippling inflation,” noting that Japan’s reliance on imported energy and raw materials has amplified the cost-of-living crisis for households and eroded corporate margins [3]. His stance aligns with broader LDP calls to phase out Abenomics, which prioritized stimulus over fiscal discipline, and adopt a dual approach of monetary tightening and fiscal consolidation [4].

However, the BOJ remains cautious. While it has raised rates to 0.5%—the highest since 2008—it has delayed further hikes amid concerns about global trade tensions, particularly U.S. tariff threats, and fragile domestic demand [2]. This hesitation reflects historical lessons: the 1990s rate hikes that precipitated Japan’s “Lost Decade” and the subsequent decades of stagnation [5]. Yet Kono’s political pressure, combined with a potential U.S.-Japan trade deal that could reduce export uncertainties, may create space for the BOJ to act more decisively in 2025 [4].

Historical Precedents: Equities and Yen in the Wake of Rate Hikes

The interplay between BOJ policy and asset markets is complex. During the 1990s, aggressive rate hikes to combat inflation led to a bursting asset bubble, triggering a prolonged equity market slump and yen volatility [5]. In contrast, recent rate hikes—such as the 0.25% increase in July 2024—initially caused sharp equity sell-offs, including a 12.4% single-day drop in the Nikkei 225, but were followed by rebounds driven by corporate governance reforms and improved investor sentiment [6].

The yen’s response to tightening has also been mixed. While short-term strength often follows rate hikes (e.g., a 0.6% appreciation after the January 2025 increase), long-term trends remain tied to U.S.-Japan interest rate differentials and global risk appetite [7]. For instance, the yen hit a 37.5-year low of 161 yen/USD in July 2024 amid BOJ dovishness but has since stabilized as rate normalization gains traction [2].

Strategic Reallocation: Equities, Yen, and the Road Ahead

Investors anticipating BOJ tightening should consider two key dynamics:
1. Equity Market Resilience: Japanese equities have shown renewed vigor, with the Nikkei 225 nearing 34-year highs in 2024, driven by corporate reforms and strong shareholder returns [6]. A further rate hike could bolster banking stocks, which benefit from tighter monetary policy, while sectors like exporters may face headwinds from a stronger yen [8].
2. Yen Strength and Carry Trade Unwinding: As the BOJ signals a terminal rate of 1% by 2025, the yen is likely to attract inflows from unwinding carry trades—where investors borrowed yen to fund higher-yielding assets. This trend, already evident in Q3 2025, has pushed USD/JPY lower and increased positioning for yen longs [9].

However, risks persist. U.S. tariff threats and Japan’s reliance on imports could cap the yen’s upside, while domestic demand remains uneven. For now, the BOJ’s balancing act—raising rates to curb inflation without derailing growth—will shape market outcomes.

Conclusion: Navigating the Tightrope

Kono’s advocacy for rate hikes underscores a pivotal shift in Japan’s monetary policy narrative. While the BOJ’s cautious approach reflects historical caution, the cumulative case for normalization is strengthening. For investors, this signals an opportunity to rebalance portfolios toward Japanese equities—particularly those with resilient business models—and yen exposure, while hedging against trade-related volatility. As the BOJ inches closer to a 1% terminal rate, the coming months will test whether Japan can avoid the pitfalls of the past and chart a path to sustainable growth.

Source:
[1] Japan's Kono Says BOJ Needs to Hike Rate to Fix Yen Inflation [https://www.bloomberg.com/news/articles/2025-09-09/japan-s-kono-says-boj-needs-to-hike-rate-to-fix-yen-inflation]
[2] BOJ Watchers Expect Delay in Japan Interest Rate Hikes [https://www.bloomberg.com/news/articles/2025-04-23/boj-watchers-expect-delay-in-rate-hikes-with-lower-terminal-rate]
[3] BOJ's fresh take on labour crunch opens door for more rate ... [https://www.reuters.com/markets/asia/bojs-fresh-take-labour-crunch-opens-door-more-rate-hikes-2025-02-06/]
[4] BOJ Rate Hike Outlook: US Trade Deal Creates Space, But ... [https://www.markets.com/news/japan-boj-rate-hike-outlook-post-us-trade-deal-468-en-EU]
[5] Lost Decade in Japan: History and Causes [https://www.investopedia.com/terms/l/lost-decade.asp]
[6] Japanese Equities in the Wake of Interest Rate Changes [https://www.confluence.com/japanese-equities-in-the-wake-of-interest-rate-changes/]
[7] Japan hikes rates to highest since 2008 as sustained ... [https://www.cnbc.com/2025/01/24/bank-of-japan-hikes-policy-rates-by-25-basis-points-to-highest-since-2008.html]
[8] The return of J-banks [https://globalalphacapital.cclgroup.com/insight/gacm-the-return-of-j-banks/]
[9] Japanese Yen Outlook: USD/JPY, GBP/JPY, EUR/JPY Price Action Setups [https://www.forex.com/en-au/news-and-analysis/japanese-yen-outlook-usd-jpy-gbp-jpy-eur-jpy-price-action-setups-2025-09-01/]