Japan’s monetary conundrum — why the yen hit a 40-year low as interest rates hit a 31-year high

The article analyzes Japan's paradoxical monetary situation where the yen fell to a 40-year low against the dollar even as the Bank of Japan raised its policy rate to 1%, the highest since 1995. Authors Steve H. Hanke and John Greenwood argue that conventional focus on interest rates is misleading. They contend that low interest rates in Japan historically reflected tight money (low M2 growth), not easy money. During COVID, BOJ's Fund Provisioning boosted broad money growth to 9.6%, ending deflation. However, money growth has since slumped to 2.5%, reverting to pre-COVID conditions. The authors warn that this will again produce low nominal GDP growth and near-zero inflation, explaining the yen's weakness despite rate hikes.