Kazuo Ueda has passed his first big test as governor of the Bank of Japan. With last week’s cleverly designed tweak to yield curve control — as the BoJ’s cap on 10-year bond yields, in place since 2016, is known — he appears to have pulled off the delicate task of changing that policy without causing financial markets to fear an imminent rise in interest rates. Ueda’s careful, patient stance is sound: Japan needs to entrench a habit of raising wages before the interest rate cycle turns downwards in the rest of the world. Rather than the BoJ, it is Japan’s government that has more to do on economic policy.The central bank’s immediate challenge last week was to raise the cap on 10-year bond yields from 0.5 per cent without signalling a normalisation of policy. It did this by keeping the 0.5 per cent figure in place but said it will now regard this as a “reference”; it raised the hard cap on yields to 1 per cent. The tactical success of this manoeuvre is clear from the limited market reaction, with 10-year yields rising modestly to around 0.6 per cent, while the yen is little changed. Ueda should feel well satisfied.

Broadly speaking, yield curve control has worked well in Japan, providing a clear guarantee of ultra-easy monetary policy through some difficult times for the economy. Nevertheless, issues have become apparent over time. In particular, fixing bond yields has made the yen highly sensitive to interest rate changes overseas, and as with any fixed price, the interest rate cap is vulnerable to speculative attack if markets think it may be changed. Raising the cap now, when there is no acute market pressure to do so, is therefore an astute move by Ueda. It provides insurance against further yen weakness at limited cost.

With inflation running at 4.2 per cent, excluding volatile fresh food and energy prices, there have been calls for Japan to tighten monetary policy much faster. Ueda should beware of this path. For the past 30 years, the BoJ has been struggling to meet its 2 per cent inflation objective. A crucial ingredient to hit the target sustainably in future is a steady rise in labour incomes, but despite stronger wage-setting this year, Japan’s economy is still some way from delivering.