Breaking the Bank of Japan?

Yield curve control is policy model doomed to failure, and Japan is finding itself at the breaking point. The yen, normally a safe-haven currency, has depreciated against the dollar sharply, and more so than other currencies have. Inflation expectations are rising in Japan to levels that would seem low in other nations, but are high by Japan’s standards. This puts pressure on JGB yields, which in turn forces the Bank of Japan to make ever-larger asset purchases, which in turn weakens the yen further. Japan effectively is trying to defend an indefensible peg, not unlike the experience of the Bank of England in 1992. The only way out of the hole is to stop digging, and abandon the “inflation overshoot commitment.” The BoJ’s meeting tomorrow is probably too soon to abandon this doomed strategy. When it does, the yen will strengthen dramatically, and until it does, it should continue to weaken toward 150 or beyond.