What is going on in Japan?

A couple months ago I did a blogpost called, “What if it Works?”

The idea of the post was to outline the potential next steps for the BoJ in the face of dramatic Yen weakness and global fixed income pressure. However, the post was also meant to outline something bigger than just YCC timing in Japan, the idea that something in Japan is changing and it is potentially significant.

From Cheap Convexity in July: The longer the BOJ keeps YCC in place in an inflationary/fiscal expansionary world, the higher the odds are that the policy actually works. We will get more fiscal easing, more near term monetary easing all with inflation and inflation expectations already moving higher. This could all set up for Japan to drop YCC from a position that inflation is actually alive and therefore the adjustment in the JGB market could actually be quite big.

In that blog post in July, I outlined two significant things had changed in July in advance of the July Bank of Japan meeting (MPM). First, The LDP won big in the Upper House elections, giving Prime Minister Kishida a mandate for the next three years to fully pursue his reflationary agenda. Second, the BoJ Tankan quarterly business survey showed that inflation expectations are continuing to build and that 1y inflation expectations are now well above 2% and closer to 3%. So the message in July was, inflationary pressures in Japan are clearly building and not just in relative terms, but to levels north of the BoJ’s 2% target, and to amplify these pressures, Prime Minister Kishida was given a three year mandate to fully pursue his reflationary agenda.

Fast forward to today, the Bank of Japan will meet this week with all of the problems in July significantly amplified.