Insightful commentary on market issues

Japan is finally seeing some inflation

Russ Mould

AJ Bell Investment Director

flew out to 0.50% in the blink of an eye. Bond vigilantes continue to test the BoJ’s commitment to defending that new line in the sand.

Source: Refinitiv data

Japan has strived after decades of near-deflation in the wake of the debt-fuelled equity and property bubble that finally popped as the 1980s ended and the 1990s began.

However, there was a cost. The yen began to tank and in late 2022 hit its lowest level against the dollar since 1998, just as the bond market began to rebel at the ongoing QQE and money printing.

Make Or Break

Something had to give and the BoJ blinked. It raised its cap on the 10-year government bond to 0.50% from 0.25% so it did not have to buy quite so many bonds and print so much money.

But that did not ease the pressure for long. Yes, the yen rallied but the yield on the 10-year bond

The BoJ’s balance sheet already exceeds 100% of GDP so the vigilantes may not give BoJ governor Haruhiko Kuroda much rest, although he steps down at the end of his second, five-year term in early April. The quandary of how best to manage the currency, the national debt, the BoJ’s balance sheet and its government bond holdings may well fall to his successor, especially as Kuroda continues to dismiss out of hand any scope for an exit from zero interest rates or quantitative easing, even if the fight to avoid deflation seems to be less of a worry.

Prime minister Fumio Kishida will make the appointment and he will be aware of the economic and political stakes as policymakers look to keep bond and currency markets at bay, using any tools they have to hand.

Central bankers and political leaders around the world will be watching and learning, too, and no doubt hoping the ending mirrors that of another cinematic classic from Kurosawa.

In Kagemusha, a castle siege is successfully fended off at the Battle of Nagashino with the help of new technology, in this case guns. The attackers are mown down in a hail of bullets. The shadow warrior protagonist, the kagemusha, is killed and his body eventually washed away down a river.

Source: Refinitiv data

Source: Refinitiv data