What's going on?
Inflation in Japan is low, really low: prices of consumer goods rose by a paltry 0.2% in June, way below the 2% target. Japan’s central bank, the Bank of Japan (BOJ), is considering its options, but while it was ruminating investors got out ahead and sold government bonds.
What does this mean?
How do you solve a problem like Maria? Well, if “Maria” is stubbornly low growth in prices, one way to do so is to pump more money into the economy by buying stocks and government bonds – a process known as quantitative easing. The idea behind this is more cash floating around equals more yen to buy stuff with, in theory pushing demand higher and, ideally, prices too. However, Japan’s been doing that for ages to little avail – the “deflation monster” lives on.
According to reports on Friday, the BOJ might step away from its inflation target for a while – and buy fewer government bonds – since the effects of continuously pumping money into the system are getting hard to ignore.
Why should I care?
For markets: Investors rushed to sell Japanese government bonds.
If the BOJ stops buying “massive” amounts of government bonds, there’ll obviously be much less demand for them – so their price is likely to fall. Investors balked and galloped off to sell theirs, sending bond yields flying up (remember, bond yields rise as bond prices fall).
The bigger picture: Inflation is kawaii.
The US central bank is raising interest rates – American inflation is above 2% – and the European Central Bank’s got a timeline for ending its own quantitative easing and eventually increasing interest rates in the eurozone. The BOJ’s been going the other way but, seeing as its efforts are neither sustainable nor producing the desired outcome, it might make an about-face and follow its mates – maybe peer pressure isn’t so bad after all.