In an effort to sustainably hit its 2% inflation target, the Bank of Japan (BoJ) has a yield curve control policy, which consists of buying unlimited amounts of 10-year government bonds to limit their yield to 0%, with a cap of 0.25%. The current global environment of high inflation and rising interest rates has put this policy under severe pressure, with the yen falling to 24-year lows against the US dollar, leading to soaring import prices and inflation. Core price pressures are also rising, and inflation expectations are at record levels, which increases the risk of inflation getting entrenched in the economy and the BoJ missing its target. Such an outcome would heighten the risk of a crisis, including in the public finances, as higher yields would increase the burden of interest expenses significantly. Japan was the first country worldwide to enter a permanent state of zero interest rate policy and the first to undertake QE – how events unfold there may offer clues about a possible eventual endgame for other highly indebted DM economies.
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