Pro Perspectives 7/20/23






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July 20, 2023

As we’ve discussed here in my daily notes, while most of the world has been fighting to get inflation down, the Bank of Japan (BOJ) has been fighting to get inflation UP.

The Western world has faced multi-decade high inflation, and has harmonized a policy response that has included the exit of QE, and key short-term interest rates that are settling in around 5%.

They have done so at a record rate-of-change in policy, and in the face of record high indebtedness.  And in the case of the U.S., with a government that has poured even more fiscal fuel on the fire.

How have they pulled it off, without strangling economies and sending sovereign debt markets into a tailspin (and government borrowing rates soaring)?


In cooperation, the Bank of Japan has buffered the effects of Western world tightening by keeping the liquidity pumping from a part of the world that has the most severe structural deflation problem, and the biggest government debt load in the world (Japan).

So rates are still negative in Japan.

And the Bank of Japan is still in full quantitative easing (QE) mode.  In fact, they are in unlimited QE mode.

By the design of their “yield curve control” program, in order to defend the upper limit of the 10-year Japanese government bond yield (which they’ve set at 0.50%), they are forced to buy Japanese bonds in unlimited amounts.  That’s freshly printed money that finds its way into foreign asset markets (like U.S. Treasuries and U.S. stocks).

With that, it’s worth noting that U.S. stocks have done well, in periods over the past year, when this upper limit of the BOJ’s yield curve has been tested.

As you can see in this chart, it’s being tested again …

And this comes as the latest inflation reading in Japan just came in well above their 2% target for the fifteenth consecutive month — which should sustain the upward pressure on the Japanese 10-year yield.



So, given the inflation picture and the pressure that rising global rates are putting on the Japanese bond market, might the BOJ adjust policy at next week’s meeting?

The Prime Minister appears to have quashed that notion today, saying they would “ensure a sustained exit from deflation.”

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