There’s been a controversy raging for some time as to whether expansionary monetary policy raises or lowers short-term interest rates, and the recent experience of Japan should end the debate. As you can see above, interest rates in 10-year Japanese Government Bonds have been soaring since mid-December. This is the exact same period during which new Prime Minister Shinzo Abe’s talk of raising the Bank of Japan’s inflation target has boosted the Japanese stock market and driven down the value of the yen.
The moral of the story is that monetary expansion works through expectations, and fiat money sovereign interest rates are also driven by expectations. Elevated expectations of nominal growth raise interest rates because they increase the inflation premium investors demand and because they increase the attractiveness of private sector investments.