C. Diaz-Alvarez,
The problem with raising interest rates now may be that the Japanese mat already be suffering from systemic demand-pull deflation, the worst of all possible economic outcomes. That being said, very low interest rates mean that holders of debt have no expectation of capital appreciation on their holdings (bonds or loans). It seems to me that part of the American expansion from the eighties until now has been a more or less continuous environment of falling interest rates. The other problem with Japan's interest rates is that they are so out of line with the rest of the world. If, for example, Sony wanted to do a very large bond issue, they would have to compete with U.S. treasuries. The returns on Japanese bonds are so low that they aren't worth buying even inside Japan.
Another interesting sort of argument for higher Japanese interest rates is the fact that the Japanese economy has a largely artificial pricing regime for many goods categories. Most notorious is real estate, where the Japanese legal system keeps prices artificially high and prevents foreclosures. Even at today's prices, which are terribly reduced from bubble-period highs, the real estate market is clearly unreasonable pricey. While this is not inflation as such it may act in the same way, giving holders of goods inventories and real estate an unnaturally complacent outlook on the economy. If complacency is the problem, higher interest rates may be the answer.
peace