The history first — this is what actually gets tested — then what's live right now.

6.1 Why Japan got stuck

Japan's asset bubble (real estate and equities) burst in the early 1990s. What followed became a textbook liquidity trap: the BOJ hit the zero lower bound by 1995, and even free money couldn't get sustained inflation going, because the real constraint wasn't borrowing cost — households and firms, scarred by the bubble collapse, wouldn't spend or invest even at zero rates. Deflation persisted for most of the next 25 years.

Why deflation is self-reinforcing: falling prices raise the real value of existing debt — the yen amount owed doesn't change, but each yen buys more, so debtors deleverage instead of spending, and consumers rationally delay purchases because things will be cheaper next year. Both effects suppress demand further, pushing prices down more — a trap monetary policy alone struggles to break, since nominal rates can't be pushed meaningfully below zero to compensate.

6.2 The inflation Japan wanted vs. the inflation it got

Japan spent decades trying to engineer demand-pull inflation — the "good" kind, where rising wages and confident consumers bid up prices because they're spending more, self-sustaining and a sign of health. What actually broke the deflationary mindset in the 2020s was largely cost-push (imported) inflation: global commodity shocks and yen depreciation (from policy divergence with the Fed) made imported energy and goods pricier, pushing up prices from the cost side, compounded by a tight labour market from an aging, shrinking workforce. A meaningfully different, less comfortable kind of inflation — it raises living costs without necessarily reflecting stronger domestic demand, exactly the tension the BOJ now navigates while hiking.

6.3 What's happening now

• Policy path: 0.75% → 1.0% (June 2026) → 1.25% (mid-Sep 2026, highest since 1995), a 7-2 split vote — genuine internal disagreement on pace.
• Why hike now: core inflation near 2.8–3%, above target long enough for the BOJ to judge the reflation case at least partly achieved — even if some of it is cost-push per above.
• The counterintuitive reaction: after the September hike, the yen weakened, JGB yields fell, and the Nikkei rallied — the opposite of the textbook script. Read: the hike was already priced in, so it became "sell the news" on yields, with focus shifting to how gradual the BOJ will be from here — gradual tightening is a green light for risk assets and keeps yen-funded carry trades only partly unwound.
• Nikkei: closed ~66,364 on 25 Sep, having touched a fresh high near 67,330 on 22–23 Sep — domestic, non-exporter names leading, consistent with "gradual normalization, improving domestic demand" rather than an export-driven rally.
• Yen outlook: intervention chatter rising (early September) even amid hikes; medium-term, continued gradual tightening should narrow the Japan–US rate gap (see the US side of that gap in §5.1) and support a stronger yen — pace genuinely contested inside the BOJ (next hike watched for December).

The contrast worth drawing in the room: Japan is normalizing up off a near-zero base after 25 years stuck at the zero lower bound, while the Fed just hiked back up off a mid-cycle pause (§5.1) and the RBI is fighting yields higher from a 5.25% base it never even cut from this year (§3.1) — three central banks tightening simultaneously for three completely different reasons: Japan escaping deflation, the US fighting a hawkish inflation re-acceleration, India defending a currency and absorbing an oil shock. That's a better answer than treating "rates are rising everywhere" as one global story.