At 3.2% in March, Japanese inflation is down slightly compared to the figure announced for February, while the underlying index (which excludes fresh food) is flat, at 3.1%.
High for the country, these figures do nothing to get the Bank of Japan out of the delicate situation in which it finds itself. On the one hand, inflation exceeds its objectives and weighs on consumers’ confidence not accustomed to seeing prices rise. But, on the other hand, as was the case elsewhere, we would expect to see a tightening of monetary policy, with a consequent increase in the price of credit.
However, Japanese economic actors (households, companies, and the State) are accustomed to meagre interest rates, Any departure from the current policy that sets policy rates at -0.1% and a 0.0% target for 10-year rates (with a tolerance of 0.5%) would result in a surge in debt-related expenses. According to the IMF, a problem for a country whose public debt reached 262.5% of GDP in 2021.
In addition, a rise in interest rates would also reduce (or stabilise) the interest rate differential separating the archipelago from the United States and Europe. This would make the yen more attractive, now vastly undervalued, and facilitate a rebound of the Japanese currency in foreign exchange markets.
But again, such an outcome would not appeal to the Tokyo authorities, for whom the cheap yen contributes to the country’s competitiveness. Therefore, if a change in monetary policy seems inevitable in the medium and long term, it is likely that the Bank of Japan will not be in a hurry to do so.
Nevertheless, we maintain a small presence in the Japanese bond market as a diversification due to the safe-haven status of these assets and their low correlation to other financial assets.