AT A GLANCE
- Headline inflation in Japan remains sticky, hitting 3.3% in June, which is above the Bank of Japan’s 2% target
- Japan remains the world’s only central bank with negative interest rates
Has anybody ever told you to be careful what you wish for because you might get it? Well, the Bank of Japan appears to be in one of those situations today.
Japan spent three decades oscillating into and out of deflation. As such, when inflation started to rise in 2022, the BOJ was initially thrilled. Finally deflation was coming to an end, and inflation was heading up to a target of 2.5%. The problem is that inflation didn’t stop heading higher at 2.5%. It’s now up to 4.2% excluding fresh food and energy. In a nation with a large elderly population where many people are on fixed incomes, having inflation too high is just as bad has having it too low.
But why should the rest of the world care what happens to Japan’s inflation rate? For starters, Japan has the world’s fourth largest economy, and what happens to the yen and to Japanese bond yields is of worldwide consequence.
Beginning in 2012, the BoJ launched a mega quantitative easing program – four times bigger than what the Federal Reserve did relative to the respective size of their economy. This QE program sent the yen plunging as the BoJ also capped 10-year Japanese government bond yields. But recently, they have softened the cap, sending not only Japanese bond yields higher but raising the cost of long-term borrowings all around the world, including in the United States and Europe.
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