There is a peculiar smugness that clings to the British establishment like damp on a stone wall. We go about our business, sipping tea, tweaking the NHS, and muttering about the continental weather, all the while convinced that our financial architecture is as sturdy as a Victorian viaduct. Then comes the news from Tokyo: Japan, that long-suffering economic sleeper, has jolted awake, hiking its benchmark interest rate to the highest level in three decades. And suddenly, the viaduct looks like a garden trellis in a gale.
Let us not mince words: this is a humiliation. For years, the British monetary authorities have strutted about, wielding the Bank of England’s interest rate lever with all the subtlety of a drunk at a piano. We have hiked, we have held, we have hoped. And where has it left us? Inflation still chewing at the foundations of household budgets, gilt yields wobbling like a soufflé, and a Chancellor who looks at the bond market the way a Victorian child might look at a locomotive—both fascinated and terrified. Meanwhile, Japan, the very avatar of deflationary stagnation, the nation whose central bank once printed money as if it were confetti, has managed to do what we cannot: it has normalised policy without capsizing its economy.
The numbers are stark. Japan’s overnight call rate now sits at 0.25 percent. Let that sink in. Even after a modest hike, it is still laughably low by historical standards. But the symbolism matters. The Bank of Japan has signalled that it is willing to take the punchbowl away. The Bank of England, by contrast, has spent the last year vacillating, stuck between the Scylla of stubborn price growth and the Charybdis of a stagnant housing market. The result? A pound that looks increasingly vulnerable, gilt investors demanding higher risk premiums, and a creeping sense that Britain’s strategic edge has been dulled.
Part of the problem is intellectual. We have become enamoured with the idea that we can enjoy low rates forever, that the old rules of fiscal discipline no longer apply. This is decadence, plain and simple. The Victorians understood that a nation’s creditworthiness was its most sacred asset. They ran tight budgets, paid down debts, and built infrastructure that lasted. We, by contrast, have spent the post-Brexit years engaged in a frenzy of borrowing, all justified by the nebulous notion of ‘levelling up’. The result is a debt-to-GDP ratio that would make a Roman emperor blush.
And what does Japan’s move tell us? It tells us that global capital is becoming less forgiving. For years, the Bank of Japan’s ultra-loose policy allowed Western governments to borrow cheaply, as Japanese investors snapped up foreign bonds. That era is ending. As Japanese rates rise, capital will flow home. Pension funds and insurance companies in Tokyo will no longer be the willing buyers of British gilts that they once were. This means that the UK government will have to pay more to borrow, which means either higher taxes or deeper cuts. Neither option is politically palatable.
There is also a cultural dimension. Japan’s rise in rates is a symptom of a broader shift: the end of the great disinflation. For three decades, the world benefited from falling prices and cheap money. That party is over. And Britain, with its overleveraged households, its fragile banking system, and its political class addicted to short-term fixes, is woefully unprepared.
The Chancellor will no doubt issue some soothing statement about the resilience of the British economy. The Governor of the Bank of England will mutter about data dependency. But the truth is this: Japan has stolen a march on us. While we have been arguing about Brexit’s benefits and bickering over trade deals, Tokyo has quietly restored monetary sanity. The samurai have drawn their swords, and all we have to offer is a rusty butter knife.
What happens next? Either we follow suit, raising rates further and accepting the pain that comes with it, or we descend further into the soft bigotry of low expectations, hoping that inflation will just go away on its own. If history teaches us anything, it is that empires crumble not from external attack, but from internal rot. The Japanese have reminded us that sound money is the bedrock of national power. Britain, once the master of that game, now looks like a student playing truant.
The sun may not set on the Empire, but it is certainly starting to set on the pound.
