The widening disparity between bond yields in Japan and America has forced the yen to its lowest level since 1990. That has raised import costs in Japan and helped lift annual inflation to 3%
Save time by listening to our audio articles as you multitaskThe higher rates rise, the sterner the test for global markets and the more likely that something breaks. Britain has already had to stave off fire-sales of assets by pension funds. Investors fret about America’s Treasury market, which has become less liquid, and the risks from junk corporate debt. Yet there is another danger that has gone underappreciated, in part because it lurks in a place where monetary policyJapan.
For years the Bank of Japan has found it easy to enforce “yield-curve control”, because the idea that it would need to raise interest rates seemed so far-fetched. From 1999 to 2012 Japan suffered bouts of deflation; for most of the rest of the 2010s inflation was positive, but well below the central bank’s 2% target. Stubbornly low inflation, and the return of deflation during the pandemic, meant that the bank looked set to stimulate the economy for ever.
The government has sought to prop up the yen by selling vast quantities of dollars: in September and October it got rid of over $60bn. As long as the gap between Japanese and American interest rates remains, though, such interventions are futile. And although homegrown inflation is modest—wage growth is under control and services prices are up by just 0.2% annually—resurgent inflation elsewhere cautions against assuming that it will simply dissipate.
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