A ‘rare’ joint statement issued by the government and the BoJ on Friday expressed concern over the yen’s rapid decline. However, currency intervention will be pushing on a string if the BoJ maintains its steadfast commitment to its current ultra-loose monetary policy stance. This was clear this morning: the yen hardly budged in response to this morning’s protest.
So far this year, and up until today, any foray by 10-year JGB yields above 0.25% had been brief. But for once, the 10-year JGB yield could not dip back below 0.25% this morning. This is significant. Pressure on the yield cap is growing. The release valve is coming through 20-, 30- and 40-year JGBs, which sold off sharply again, extending the global government bond rout that intensified at the end of last week.
The BoJ is stuck. Any new target – for example, 25 basis points higher – will not be credible. If the BoJ simply abandons the yield target, this will send JGBs plummeting. There is no smooth exit from yield curve control when global government bonds are selling off so aggressively, and inflation is rising.
Matters would perhaps be slightly different if the government was shoring up the public finances. But instead, the MMT doctrine appears to be taking hold in key parts of the Japanese administration. The last remaining semblance of ‘fiscal prudence’ appears to have gone out of the window, with the deletion of a pledge from earlier government statements calling for Japan’s budget to be balanced by 2025.
That oil prices are not sliding, on the back of new Chinese lockdown announcements and tumbling global stock markets, indicates the scale of the energy crisis facing the global economy. The food and energy price shock will give Governor Kuroda the inflation he so wants, which could precipitate a vicious selling of JGBs. Stores in Japan are planning a ‘summer of price hikes’.
