According to the Ministry of Public Management, the national consumer-price index (CPI) print in December came in at 1.5 percent. This is close to the Bank of Japan (BoJ) Governor Haruhiko Kuroda’s two percent target. The ascent was quick as the same national CPI seen a negative .7 percent reading in June. The question is that with two percent nearing, what is Kuroda’s plan on an exit?
The Japanese government bonds (JGBs) have remained the world’s lowest yielding at .67 percent, but this is largely represented by the central bank’s large monthly purchases. The problem is weather confidence will be lost prior or during a taper that would send borrowing costs higher. Kuroda said it is too early for an exit strategy, but nobody knows when the BoJ moves past the threshold of “too late.”
The BoJ is purchasing more than 50 percent of the annual debt issued at ¥7 trillion per month. The BoJ is risking, what some said the United States was in, a quantitative easing trap. This is where long-term rates surge due to a taper from the central bank. JP Morgan’s chief economist on Japan, Masaaki Kanno said “who is going to buy bonds once the BOJ starts tapering? We don’t know and that could put Japan into serious danger.”
What is troubling is that Kanno believes the JGB yield could go beyond two percent if fiscal health is not restored prior to the BoJ’s exit.