This is the chart of the day in global macro:
Japan CPI ex ffresh food and energy
Core Japanese CPI rose to 4.2% y/y in today’s report, which is the highest since 1981.
Normally, you would think that means the Bank of Japan should be tip-toeing out of ultra-easy monetary policy but they’re so committed to fighting inflation and have gone so far down the QE pipeline that there’s no way out. BOJ Governor Ueda highlights that prices should be falling so and that they’re committed to breaking the disinflationary mindset.
They should be careful what they wish for. Low inflation in Japan has sapped the dynamism from the Japanese economy but so have worsening demographics. In spite of that, it’s still an extremely rich and stable country.
A period of high inflation following 40 years of growing indebtedness and runaway government spending could be catastrophic. In fact, this may come to be remembered as one of the all-time great economic blunders.
The reality is that low inflation isn’t that bad of a problem.
What’s particularly concerning today is that the yen is falling even as inflation rises. That’s probably a reflection of quarter-end flows and technical momentum but there’s certainly a scenario where Japan trips into a period of high inflation and a falling currency. There will certainly be some volatility if the BOJ is forced to end YCC and ultra-low rates but I don’t think we should take it as a given that it will be yen positive in the medium term.
Overall, betting against Japan’s debt bubble has been a losing trade for a generation but if something were to finally prick it, my bet would be inflation. Is this it? I can’t be sure but there is far too much complacency around what could be a calamity for global capital markets.