The Bank of Japan is playing one of the most-dangerous games in central banking history.
The whole world is struggling with inflation and their currency is in the dumps, yet they continue to hammer the most-aggressive QE policy in history. The aim is to break a deflationary mindset but the problem is that they might succeed and find out that zeroed-out inflation is much preferable to high inflation.
Today’s summary opinions from the most-recent Bank of Japan meeting shows that at least one BOJ member of the 9-person BOJ policy board argued for an urgent debate.
“A revision to the treatment of
yield curve control should be discussed at an early stage,” one member argued, noting that the cost of yield curve control was “high”.
Other comments supported the current policy but displayed growing unease about high prices.
“Corporate behavior has seen clear changes, and price and wage hikes have been incorporated
into corporate strategy,” one comment said.
“There are both upside and downside risks to the outlook for consumer prices. As an upside
risk, attention is warranted on the possibility that firms’ pass-through of cost increases to
consumer prices will continue for longer than expected,” another said.
In last week’s report, Japanese CPI ex fresh food and energy rose above 4%.
Japan CPI ex ffresh food and energy
There’s no direct talk of transitory but the BOJ’s forecasts have inflation falling back down in time.
“Due attention is required because the possibility that the persistence of price rises in Japan has been underestimated cannot be ruled out, as were the cases with Europe and the United States,” a comment said, highlighting the stakes.
And the stakes are particularly high for Japan because of its extreme debt load.
At this point, it’s wholly irresponsible not to back away from total yield curve control or zero rates. Policy can remain stimuluative without resorting to such extreme measures.
The market, though, has been lulled into the same sense of complacency. There was some yen buying on the headlines yesterday but it has completely reversed since and yen crosses remain near multi-month (and sometimes multi-year) highs.The next Bank of Japan meeting isn’t until July 28 but risk will be high and I’d expect yen strength for 3-4 days beforehand.
Moreover, don’t sleep on the risk to global bond markets if the BOJ pulls the plug. A shift in policy, or a return of real inflation would upend the entire global bond market.