Central Bank Policy Continuity in Japan: Opportunities Amidst the Legacy of Takatoshi Ito

The death of Takatoshi Ito in 2025 marked the end of an era for Japan's monetary policy discourse. As a leading advocate for inflation targeting, Ito's intellectual contributions laid the foundation for the Bank of Japan's (BOJ) eventual adoption of a formal 2% inflation target in 2013Review of Monetary Policy from a Broad Perspective^[1]. His work emphasized the critical role of anchoring expectations in combating deflation, particularly under the constraints of the zero lower boundJapanese equities look set to brave political headwinds^[3]. While the BOJ's policy framework has evolved since his passing, the continuity of his core principles—such as the importance of credible inflation goals—remains evident in the institution's cautious normalization efforts. This analysis explores how the BOJ's post-Ito policy trajectory, coupled with recent market dynamics, is creating distinct investment opportunities in Japanese equities and inflation-linked assets.

Policy Continuity and the Post-Ito Era

The BOJ's commitment to inflation targeting has persisted despite the absence of Ito's direct advocacy. Since 2024, the central bank has signaled a gradual shift away from unconventional measures, including the end of negative interest rates and the initiation of ETF sales to unwind its massive balance sheetBOJ Policy Normalization: Systemic Impacts on U.S. Treasuries, …^[4]. These steps reflect a broader normalization path that aligns with Ito's long-standing emphasis on managing expectations to achieve price stabilityTakatoshi Ito, a leading Japanese economist, dies at 74^[5]. Notably, the BOJ's December 2024 report, Review of Monetary Policy from a Broad Perspective, underscored an institutional commitment to learning from past policy missteps, such as the premature withdrawal of quantitative easing in the 2000sBOJ’s Review of the Monetary Policy Since the Late 1990s^[2]. This continuity suggests that the BOJ's framework remains anchored in the intellectual legacy of figures like Ito, even as it adapts to new economic realities.

Market Responses to Policy Normalization

The BOJ's recent actions have triggered mixed but discernible market responses. For instance, the Nikkei 225 index rose 11% from early July to late September 2025, driven by reflationary pressures, corporate reforms, and the return of foreign investorsJapanese equities look set to brave political headwinds^[3]. However, the announcement of ETF sales in September 2025 initially caused a 2.5% intraday drop in the index, reflecting investor uncertainty about liquidity dynamicsBank of Japan Holds Rates, Plans ETF Sales: Next Stage in Policy Normalization^[6]. Analysts note that the BOJ's deliberate pace—selling ¥330 billion in ETFs annually—aims to avoid market disruption while gradually reducing its influence on equity valuationsReview of Monetary Policy from a Broad Perspective^[1]. This balancing act highlights the central bank's dual mandate: maintaining financial stability while fostering sustainable inflation.

For inflation-linked assets, the BOJ's rate hikes have improved the appeal of Japanese Government Bonds (JGBs). With policy rates rising to 0.5% in 2025—the highest in 17 years—JGB yields have climbed, attracting domestic and international capitalBOJ’s ETF exit: A century of uncertainty looms for Japan^[7]. Meanwhile, the unwinding of the yen carry trade—where Japanese investors borrowed low-yielding yen to invest in higher-yielding foreign assets—has reduced demand for U.S. Treasuries, indirectly boosting JGBs' relative attractivenessBOJ Policy Normalization: Systemic Impacts on U.S. Treasuries, …^[4]. These shifts suggest that inflation-linked assets in Japan are becoming more resilient to global capital flows, a structural change with long-term investment implications.

Investment Opportunities in Japanese Equities

The normalization of monetary policy is reshaping equity sector dynamics. Financials, particularly large banks like MUFG, have benefited from improved net interest margins as rates riseBOJ Policy Normalization: Systemic Impacts on U.S. Treasuries, …^[4]. Conversely, long-duration growth stocks—such as those in the tech and renewable energy sectors—face valuation pressures in a higher-rate environment, favoring a rotation toward value and defensive sectorsBOJ’s Review of the Monetary Policy Since the Late 1990s^[2]. Small-cap stocks, which were indirectly supported by the BOJ's previous ETF purchases, may experience marginal downward pressure as liquidity tightensBank of Japan Holds Rates, Plans ETF Sales: Next Stage in Policy Normalization^[6]. However, this creates opportunities for investors to identify undervalued firms with strong fundamentals, particularly in sectors poised to benefit from domestic demand growth.

The Road Ahead: Balancing Risks and Rewards

The BOJ's cautious approach to normalization—raising rates incrementally while maintaining asset purchases—reflects its awareness of Japan's unique challenges. Persistent deflationary expectations, a fragile export sector, and global geopolitical risks necessitate a measured pathTakatoshi Ito, a leading Japanese economist, dies at 74^[5]. For investors, this environment offers a window to capitalize on sectoral rotations and inflation-linked assets while hedging against potential over-tightening. The BOJ's roadmap to achieve its 2% inflation target by 2028, as outlined in its 2024 reviewReview of Monetary Policy from a Broad Perspective^[1], provides a clear timeline for policy adjustments, enabling investors to align their strategies with anticipated market shifts.

Conclusion

Takatoshi Ito's legacy endures in the BOJ's commitment to inflation targeting and policy continuity. While his passing has not derailed the central bank's trajectory, it has underscored the importance of institutional memory in navigating complex economic transitions. For investors, the normalization of monetary policy in Japan presents a unique opportunity to position portfolios for both equity sector rotations and inflation-linked gains. As the BOJ continues its delicate balancing act, those who align with its long-term vision may find themselves well-placed to capitalize on the evolving landscape.