New month, new inflation peak in Japan. The increase in consumer prices reached 4.3% in January and 4.2% according to the underlying index, which excludes fresh food. So we must return to 1981 to recover Japanese inflation at similar levels, which naturally worries households and the authorities.
For the latter, the challenge is daunting. The traditional method of controlling inflation, the rise in key interest rates, would result in higher interest rates. But this would be challenging in a country where the last fiscal year close to balance dates back to the early 1990s, and the gross public debt was already 256.9% of GDP in 2021.
At such a high level of debt, each increase in interest rates results in a substantial rise in debt charges that the country must bear.
Cheap credit is, therefore, a necessity for Japan. However, when interest rates are rising in the Western world, the rising interest rate differential weakens the yen. Consequently, it makes the position of the Japanese authorities even more complex, which had to intervene several times in recent weeks to keep the 10-year interest ceiling at 0.5%.
Suppose we have reduced our exposure to the Japanese government bond market. In that case, we maintain a small exposure to these assets, weakly correlated with most other financial assets, helping to contain the risk of a diversified portfolio, which, thanks to the Yen, offer significantly undervalued appreciation potential over the medium and long term.