Quora Answer: Is It Possible for Japan to Have a Conservative Government & Loose Monetary Policy Simultaneously?

The following is my answer to a Quora question: “Is it possible for Japan to have a conservative government and loose monetary policy simultaneously?”

Monetary policy is not for the government to set.  In Japan, as in every serious economy, the central bank operates independently of the cabinet.  The Bank of Japan sets interest rates.  The Liberal Democratic Party governs.  These are separate institutions with separate mandates.  That said, the relationship between the two in Japan is not — and has never been — clean.  It is a long, complicated, and occasionally undignified entanglement.  Understanding it requires going back to where the current architecture was built.

Abenomics: The Architecture of the Problem

On 26^th December 2012, Shinzo Abe, Prime Minister of Japan, returned to office with an economic programme.  He called it Abenomics.  It rested on three arrows: aggressive monetary easing, fiscal stimulus, and structural reform.

The first arrow was the consequential one.  Abe publicly pressured the Bank of Japan to adopt an inflation target of 2 per cent and to do whatever it took to reach it.  In April 2013, then-Governor Haruhiko Kuroda launched quantitative and qualitative easing on a scale Japan had never attempted.  The BOJ bought Japanese government bonds, equities through exchange-traded funds, and real estate investment trusts.  By the peak of this programme in early 2024, the BOJ’s balance sheet had reached ¥756 trillion — equal to the entire GDP of Japan.

In September 2016, Kuroda added yield curve control.  The BOJ committed to holding the 10-year Japanese government bond yield at or near zero per cent.  This meant the central bank would buy whatever quantity of bonds was necessary to defend that target, regardless of the fiscal consequences for the government.  The BOJ became, in effect, the government’s financier of last resort — a role that is technically prohibited but functionally unavoidable when the central bank commits to a price target on government debt.

This is how the Bank of Japan came to hold 79 per cent of its ¥717 trillion balance sheet in government securities as of mid-2025.  The BOJ did not stumble into this position.  It was engineered by a conservative government that decided the theoretical independence of the central bank was a dispensable formality when growth targets were at stake.  Abe was assassinated on 8^th July 2022.  His monetary legacy survived him.

The Takaichi Government: Sanaenomics

On 8^th February 2026, Japan held a general election.  The Liberal Democratic Party, led by Prime Minister Takaichi Sanae, won 316 of 465 lower house seats.  It was the first time a single party had held more than two-thirds of the lower house in postwar history.  Takaichi is, by any reasonable political taxonomy, a conservative.  She supports expanding defence spending to above 2 per cent of GDP.  She favours anti-espionage legislation, stricter immigration controls, and the preservation of traditional family law against reformers who want separate surnames for married couples.  She is hawkish on security, nationalist on culture, and has described herself as continuing the legacy of Shinzo Abe.

On economics, she has branded her programme “Sanaenomics” — a continuation of Abenomics with a security dimension grafted on.  The first arrow remains: expansionary fiscal policy, funded by deficit bonds, with public investment directed toward artificial intelligence, semiconductors, and shipbuilding.  She has pledged refundable tax credits for low-income households, the abolition of the provisional gasoline tax rate, and a temporary suspension of the consumption tax on food.

On monetary policy, she has been careful with language while being clear in intent.  She has said fiscal and monetary policy must “align” — the formulation that concerned markets and analysts who remembered how that alignment worked under Abenomics.  She has acknowledged the Bank of Japan’s autonomy over its tools while making it clear that she views current inflation as cost-push rather than demand-driven, meaning she does not believe the conditions for sustained rate hikes have been met.  When Takaichi won the LDP leadership contest in October 2025, analysts immediately reassessed the path for BOJ rate hikes.  The yen weakened.  Equities rallied.  These are the market’s translations of a political signal: rates will stay lower for longer than the central bank might otherwise choose.

What the BOJ Has Done

The Bank of Japan began raising rates in March 2024, when it ended eight years of negative interest rates.  This was its first rate increase since 2007.  The BOJ then raised rates again in July 2024 — a decision with immediate global consequences.  The yen carry trade, a mechanism by which investors borrow cheaply in yen to fund higher-yielding investments elsewhere, began unwinding.  Global equity markets fell sharply.  The BOJ was forced to clarify that it would not raise rates again in the near term.  The episode demonstrated, vividly, that a decade of artificially suppressed rates does not end without pain.

By December 2025, the policy rate had reached 0.75 per cent.  In June 2026, the BOJ raised it again — to 1.0 per cent, a 31-year high — driven by inflation pressure from crude oil prices linked to the Middle East conflict and a weakening yen.  The decision was taken without Governor Kazuo Ueda, who was hospitalised for treatment of a hepatic cyst infection.  The remaining board members acted without him.  That is not a tight monetary policy.  It is the slowest normalisation in central banking history, conducted by an institution that spent a decade buying its own government’s debt at zero yield and is now trying to wean itself off without causing a bond market crisis.

The BOJ’s balance sheet, at ¥717 trillion as of mid-2025, had fallen ¥39 trillion from its peak through quantitative tightening — but government securities still constitute ¥567 trillion of that total.  The BOJ holds the majority of Japan’s government bond market.  Raising rates increases the cost of servicing a national debt that reached ¥1,346.7 trillion at the end of June 2026 — ¥10.95 million per Japanese citizen.  Japan’s debt-to-GDP ratio for fiscal year 2026 stands at 187.6 per cent, a deterioration from the January projection, driven by supplementary budget spending of more than ¥3 trillion.

The central bank cannot normalise aggressively without threatening the fiscal sustainability of the government.  The government cannot consolidate without threatening the growth targets it has staked its political mandate on.  This is the trap Japan built for itself over thirty years, and every interest rate decision since 2024 has been a negotiation with the walls of that trap.

Why a Conservative Government Wants Loose Money

The apparent paradox — a right-wing government presiding over, and indeed preferring, expansionary monetary policy — dissolves once you understand what Japanese conservatism is conserving.  Western conservatism, in its classical form, is associated with fiscal restraint, sound money, and suspicion of government intervention in the economy.  The LDP is a conservative party in the sense that it conserves the existing power structure: the relationship between the party, the bureaucracy, the industrial conglomerates, and the rural constituencies that have returned LDP candidates to parliament for most of the postwar period.  It is not a fiscally conservative party in any meaningful sense.  Japan’s debt-to-GDP ratio did not reach 187.6 per cent under socialist governments.  It reached that figure under the Liberal Democratic Party, which has governed Japan for all but four years since 1955.

Loose monetary policy serves the LDP’s political coalition.  Cheap credit supports large corporations.  A weak yen boosts export earnings for Toyota Motor Corporation, Sony Group Corporation, and the other industrial giants whose health is identified, in the public mind, with Japan’s national health.  Fiscal stimulus, funded by deficit bonds that the BOJ buys to keep yields suppressed, funds the public works and regional transfers that keep rural constituencies loyal.  Takaichi did not invent this arrangement.  She inherited it.  Her distinctiveness lies in adding a national security dimension — directing stimulus toward semiconductors and shipbuilding rather than roads and bridges — while maintaining the same underlying fiscal and monetary logic.

Japan’s current position is sustainable until it is not.  A debt-to-GDP ratio of 187.6 per cent is manageable as long as domestic investors continue to hold Japanese government bonds at yields that remain below nominal GDP growth.  The BOJ’s yield curve control, and before that its zero-interest-rate policy, suppressed those yields artificially for over a decade.  The policy worked because Japan’s domestic savings pool is enormous, Japan’s current account is in surplus, and there is no foreign currency component to the debt that could trigger a sudden reversal.  What has changed is that inflation has arrived.  Japan’s core inflation was above the BOJ’s 2 per cent target for most of 2023 and 2024.  The BOJ is now in the uncomfortable position of needing to raise rates to address inflation while simultaneously being unable to raise rates too far without detonating the bond market.  Each 100 basis points of rate increase on ¥1,346 trillion of central government debt costs the Japanese taxpayer ¥13.4 trillion per year in additional interest expense — equivalent to 2.3 per cent of GDP.

The BOJ’s path to 1 per cent took two years and caused a global carry trade unwind.  The path to 2 per cent — if inflation requires it — would be considerably more turbulent.  Takaichi’s fiscal expansion makes the BOJ’s task harder.  Every additional trillion yen of deficit spending increases the stock of government bonds that need to be financed.  Every additional bond issued is one more reason the central bank cannot raise rates too sharply without triggering a crisis in the market for the paper it spent a decade buying.

Takaichi is aware of this.  Her formulation — that nominal interest rates should remain below nominal growth — is not a naive statement.  It is a statement about the only path on which the current fiscal position is arithmetically sustainable.  She is not asking the BOJ to remain loose because she does not understand monetary policy.  She is asking the BOJ to remain loose because she understands, very well, what happens to the Japanese government’s financing position if it does not.

The Assessment

So: can a conservative government coexist with loose monetary policy?  In Japan, the answer has been yes for thirty years, and for reasons that are not coincidental.  The LDP built a fiscal position that depends on cheap money.  It then elected leaders who understood that political survival depends on maintaining the conditions that make cheap money available.  It also appointed, or pressured the appointment of, central bank governors who understood the political economy of their institution’s independence.  Takaichi is running the same programme with updated branding.  Sanaenomics is Abenomics with a harder security edge and a slightly more honest acknowledgement of the fiscal risks.  The BOJ is normalising, slowly, under the constraint that it cannot normalise too fast without setting off a fiscal crisis that would destroy the political conditions under which it operates.

This is not a contradiction.  It is a trap — elegantly constructed over three decades, maintained by a political establishment that has never found the domestic coalition for the consolidation that would be required to exit it, and papered over by a central bank that has spent a decade pretending that buying half the government bond market is a monetary policy tool rather than a fiscal subsidy dressed in central bank clothing.  The answer to “Is it possible?” is yes.  The better question is: for how long?  Japan’s creditors, mostly domestic, have been patient.  Demographics are not.  Japan’s population of 122.93 million is shrinking.  The domestic savings pool that finances the debt will shrink with it.  At some point, the arithmetic catches up with the politics.  That point is not today.  It may not be this decade.  But it is not a theoretical possibility.  It is a scheduled event.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code