Bank of Japan stares down the bond market

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

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HONG KONG, June 24 (Reuters Breakingviews) – Japan’s consumer prices, including energy but not food, increased 2.1% in May, above the central bank’s 2% target for a second consecutive month. It’s the wrong kind of inflation, a by-product of sanctions on Russia and U.S. interest rate hikes rather than from healthy consumer demand. With the yield spread between American and Japanese government bonds at nearly 3 percentage points, the yen has softened to 135 per dollar, its weakest since 1998. That will raise the cost of imported goods – the country has run a trade deficit since July 2021 – further increasing prices.

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

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Editing by Jeffrey Goldfarb and Thomas Shum

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