BoJ prevents an inflationary cycle by raising rates – Commerzbank

Many market participants do not believe the BoJ’s actual forecasts for the economy and inflation. I don’t even think their forecasts are honest, because they seem shallow because they provide arguments for a monetary policy that is being conducted for completely different reasons, notes Commerzbank FX analyst Ulrich Leuchtmann.

BoJ officials are terrified of real reinflation

“I think BoJ officials are actually terrified of real reinflation, 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 hopelessly over-indebtedness of the Japanese treasury. And then the BoJ will very quickly be under pressure to fund the struggling government with JGB purchases.”

“Economic literature deduces 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’s why the BoJ stayed put during the past inflationary shock, and why it’s now raising its key rate when inflationary risks are much less clear. Of course, if this description is correct, the potential to raise interest rates will be microscopic. Those basing their long JPY position on the hope of significant rate normalization could be wrong.”