Many market participants do not believe in the BoJ's real economic and inflation forecasts. They don't even believe that their forecasts are honest, because they seem superficial because they provide arguments for a monetary policy that is pursued for completely different reasons, Commerzbank’s FX analyst Ulrich Leuchtmann notes.
BoJ officials are terrified of genuine re-inflation
“I believe that the BoJ officials are in fact terrified of genuine re-inflation, which would force them to trigger a normalization of monetary policy and, as a result, significantly higher long-term yields. This would very quickly lead to the Japanese treasury being hopelessly over-indebted. And then the BoJ would very quickly come under pressure to finance the struggling government with JGB purchases.”
“The economic literature infers from such a situation the risk of high inflation. In Japan, however, we see the opposite. The BoJ prevents an inflationary cycle by using inappropriate interest rate hikes to put an early end to any threat of re-inflation. Because and as long as the BoJ does this, there is no risk of fiscal imbalance.”
“That is why the BoJ was staying put during the past inflation shock, and why it is now raising its key rate when inflation risks are far less clear anymore. Of course, if this description is accurate, the potential to hike interest rates will be microscopic. Those who base their JPY long position on the hope of meaningful rate normalization could be wrong.”
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