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The global macro chart of the day is presented here.
According to the latest report, the Core Japanese CPI increased by 4.2% year-on-year, marking its highest level since 1981.
Typically, one would assume that the Bank of Japan would start withdrawing from extremely relaxed monetary policies. However, they are determined to combat inflation and have already implemented a significant quantity of quantitative easing, making it impossible to retreat. Governor Ueda of BOJ emphasizes the importance of prices declining and their commitment to reversing the trend of disinflation.
It would be wise for them to consider their desires cautiously. The Japanese economy’s vibrancy has been weakened not only by the low inflation rate but also by the deteriorating demographics. Nevertheless, Japan is still a very affluent and dependable country.
A phase of elevated inflation after four decades of increasing debt and uncontrolled expenditures by the government could have disastrous consequences. It is possible that this will be regarded as a massive economic mistake in history.
The fact is that low inflation is not a significant issue.
The current situation causing worry is that despite an increase in inflation, the yen is experiencing a decline. This could be due to end-of-quarter movements and technical trends, but it raises the possibility of Japan experiencing a phase of high inflation and a falling currency. If the Bank of Japan is compelled to terminate YCC and maintain very low rates, it may result in some instability, although it is not certain that it will benefit the yen in the long run.
In general, betting against the debt bubble of Japan has not been a profitable trade for a long time. However, if something were to finally burst the bubble, I believe that inflation would be the culprit. It is uncertain if this is that moment, but there seems to be excessive nonchalance regarding what could potentially cause a catastrophe for worldwide financial markets.
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