RESEARCH CONTENT
There is a lot of market discussion about when the BoJ, the last Central Bank to maintain negative rates, will tighten policy. This short note demonstrates that there are some serious disinflationary base effects coming up and how the BoJ is boxed in with respect to policy changes.
Comparing the Japanese inflation basket with that of other countries highlights a very unique difference, which stems from the Yen’s steadfast depreciation over the last 3 years.
The BoJ is in a tough and unique spot – if it tightens, the negative disinflationary base effects will be stronger, thus heightening disinflation (of both CPI and API), if it does not, then the currency will continue being debased.
Recent Japanese history and financial history more broadly suggests which course the BoJ is likely to be followed, which is continued low rates, QE and currency debasement.