There is every chance the BoJ could raise the ceiling on 10-year JGB yields tomorrow. All eyes are focussed on the escalating situation in the Middle East. Inflows into US government bond funds have surged too, as many anticipate a peak in yields. The BoJ may judge, now is a good time. Still, whether the BoJ adjusts its YCC band at this meeting, or the next, does not change the big picture. The current Japanese policy mix remains contradictory: monetary policy is too loose, and this will have to change.
All the BoJ’s measures of underlying inflation were above 2% as of September. The cleanest read of underlying inflation in Japan is the weighted median CPI. In the twenty years between 2001-21, the y/y for the median CPI was range bound, between -0.50% and +0.25%, even during the energy price spike of 2007/08. However, it surpassed 2% last month, hitting 2.03%. Tokyo CPI services inflation accelerated to 2.11% this month, the quickest rate of services price increases since March 1998.
The timing of a BoJ shift may be hard to predict, but Japan remains a risk to the outlook for long-dated government bonds globally. The strong data out of the US last week in itself is a good reason to remain cautious of renewed calls for a top in long-dated Treasury yields. Pressures on defence spending continue to build, globally, and the costs to governments from climate change keep increasing. China has lifted its 2023 budget deficit to around 3.8% of GDP, up from 3% originally. Even in the Eurozone, the picture is nuanced. The travails of Germany contrast with robust growth in Spain.
