There’s good news for China: It is possible to exit deflation. It just takes a whole helluva long time.

Japan hiked rates Friday for the third time in 10 months, by the most since 2007 and to the highest since 2008 — “way” up at 0.5%.

I wouldn’t call the January BoJ meeting a “non-event,” exactly, but it was fully-priced, and if it was a non-event, that’s a good thing. July’s BoJ hike, you might recall, was gas on the fire for what, until that point, was a slow-burning global carry unwind. Things escalated when a spate of soft US macro data drove additional yen strength following that month’s BoJ meeting. The situation crescendoed on Monday, August 5, when the Nikkei crashed the most on record and the US suffered what, on some metrics anyway, was the biggest vol shock since February 2018 (when the VIX ETN complex imploded).

The BoJ apologized (literally) for that incident, which proved beyond a shadow of a doubt that even if the Japanese economy was ready for a succession of rate hikes, markets probably weren’t. The yen was among the most popular funders on Earth for as long as anyone could remember, and all of a sudden, the central bank was hiking, and hawkishly at that (i.e., raising rates and tipping more to come). Funding in yen wasn’t free anymore. As I put it at the time, traders were witnessing no less than “an adjustment to the global market infrastructure.”

Kazuo Ueda learned a thing or two from that fracas. The bank took a step back and found a series of excuses to delay the next hike, which finally came on Friday. This time, traders, economists, forecasters and everyone with even a passing interest in Japanese monetary policy, was more or less on the same page.

“With wages continuing to rise, underlying CPI inflation has been increasing gradually toward 2%,” the BoJ said, adding that price growth’s “likely” to be at “around” 2.5% this year “due to the higher import prices stemming from the yen’s depreciation” and other factors.

Just hours earlier, inflation data covering December showed consumer prices on the metric favored by policymakers rose 3% YoY in December, the briskest since August of 2023.

A lot of that’s energy (prices for which rose 10% last month), but even excluding energy costs, inflation’s running nearly 2.5%. That’ll work if you’re Japan.

The editorial accompanying the updated macro outlook found the BoJ expressing something that sounded quite a bit like confidence. “While the effects of pass-through to [inflation] led by the past rise in import prices are expected to wane, underlying CPI inflation is expected to increase gradually,” the bank said. In the presence of labor shortages, “the output gap will improve and medium- to long-term inflation expectations will rise with a virtuous cycle between wages and prices continuing to intensify.”

I pulled the table, below, directly from Friday’s BoJ communications. I don’t see a lot of utility in making a chart out of it.

Note the orange annotations (mine). Focus on those. That upward shift in the median 2025 inflation projection is what motivated the hike.

Ueda didn’t say when the BoJ will deliver the next increase, but generally speaking, 1%’s seen as the destination. So, another two moves the size of Friday’s get the bank to terminal. I don’t think they’re gonna make it. Something will intervene, maybe Donald Trump, maybe another bout of asset price volatility or hell, who knows, maybe a(nother) tsunami, God forbid.

For now, the real policy rate’s still deeply negative, something the BoJ’s keen to emphasize after every meeting. “[A]ccommodative financial conditions will continue to firmly support economic activity,” the bank said, on the way to tipping additional hikes, contingent on the economy evolving in-line with the new forecasts.

Ultimately, Ueda escaped from the decision and the press conference with the yen mostly unchanged and JGB yields up a fairly pedestrian 3bps. I don’t pretend to know what he looks for in terms of price action in and around BoJ meetings, but I’d call that success.

Coming full circle, officials in China — where the implied GDP deflator just spent a seventh quarter in negative territory — can take heart: Deflation can be vanquished with diligence, persistence and, as Haruhiko Kuroda famously put it, “a positive attitude.”

The chart above, from SocGen’s Albert Edwards, speaks for itself. In case it doesn’t, Albert used the header to elaborate.

On Friday, Bloomberg reported that “all but four of China’s 31 mainland provinces have lowered their inflation targets for this year.” That, the linked article said, is “likely a prelude to a decision in March to lower the national goal.”

If it is indeed the Party’s intention to set the annual inflation target below 3%, it’d be the first time in more than 20 years.