The Bank of Japan monitors the bond market

A Japanese flag flies atop the Bank of Japan building in Tokyo May 22, 2015. The Bank of Japan stuck to its massive stimulus package and offered a slightly more optimistic view of the world’s third-largest economy on Friday, as a A modest rebound in consumption helped service sector sentiment improve to a one-year high. REUTERS/Toru Hanai

HONG KONG, June 24 (Reuters Breakingviews) – Consumer prices in Japan, including energy but not food, rose 2.1% in May, above the 2% target of the central bank for a second consecutive month. This is the wrong kind of inflation, a byproduct of sanctions on Russia and interest rate hikes in the United States rather than healthy consumer demand. With the yield spread between US and Japanese government bonds close to 3 percentage points, the yen has weakened to 135 to the dollar, its weakest since 1998. This will raise the cost of imported goods – the country has been running a trade deficit since July 2021 – further raise prices.

Bank of Japan Governor Haruhiko Kuroda is unfazed. Growth is tepid and inflation at 2% is hardly torrid, even after years of deflation. Japan Inc remains reluctant to invest domestically, one of the reasons the yen is so weak. Such conditions argue for keeping monetary policy loose, but some bond investors are betting Kuroda will have to blink if the yen continues to slide. Other parts of the bureaucracy are already signaling concern. Fighting the BOJ is an infamous “undertaker’s job,” but this time around, it’s not clear who the undertaker is yet.

(By Pete Sweeney)

(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)

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