The Bank of Japan Plays the Waiting Game: Is Inflation a Dragon or Just a Housefly?

Winter is Coming... Or is it Just a Mild Autumn?

My dragons are telling me that the economic winds are changing yet the Bank of Japan remains stubbornly…still. Since the great plague while the rest of the world’s central banks have been busy raising rates faster than I can say “Dracarys,” Japan’s central bank has been an outlier. They seem unfazed by inflation even though their own targets have been breached since April 2022! Are they mad? I've seen mad and this is either genius or utter foolishness. They've raised rates a measly 60 basis points since March 2024. A pittance! It reminds me of when Viserys thought he could command my dragons. Foolish foolish man.

Rice Rice Baby: The Root of All Evil?

Apparently the main culprit for this inflation is…rice. Yes you heard me right. Rice prices have surged higher than a dragon soaring over King’s Landing. It seems that poor harvests have caused the price of this staple to double marking the largest increase in over half a century. As Marcella Chow of JP Morgan Asset Management wisely notes rice accounts for about half of Japan’s core inflation. Half! Can you imagine if the Dothraki depended on rice instead of horse meat? Khaleesi would be in a serious fix.

The Governor Who Lived: Ueda's Cautious Stance

But fear not for Governor Kazuo Ueda assures us that this is merely a “temporary” spike. He blames rising import costs and rice prices and expects these pressures to “dissipate.” He believes underlying inflation remains below their target. This reminds me of the time I was told the Iron Throne was mine by right only to find out the reality was a bit more complicated. Is Ueda seeing something the rest of us aren’t or is he blinded by his own councilors' sweet words?

Growth is Coming (Eventually?)

The Bank of Japan seems to believe that raising rates would choke the economy. Higher rates might tame inflation but they could also crush growth. Nomura's Yujiro Goto fears Japan may experience negative growth due to trade tensions with the US. These potential tariffs could cripple their export oriented economy. Ah trade negotiations as treacherous as navigating the politics of the Seven Kingdoms. One wrong move and you find yourself facing the wrath of a dragon… or in this case crippling tariffs.

A Yen for the Past: Deflationary Ghosts

The BOJ remembers the ghost of persistent deflation experiences which prompted premature tightening. Frederic Neumann of HSBC wisely notes that the BOJ fears normalizing policy too late. A weakened Yen is currently helping keep their exports competitive. The Central Bank is taking a slower approach as the inflation appears to be driven mainly from a depreciating Yen. All the while BOJ board member Naoki Tamura suggests that the bank may need to raise interest rates "decisively" if upside risks to prices grow.

A Narrow Path: The Tightrope Walk

So the Bank of Japan walks a perilous path. They must raise rates just enough to keep inflation from running wild but not so much that they send the economy spiraling back into deflation. As Frederic Neumann puts it the BOJ faces a "tough narrow path ahead." It’s a balancing act worthy of the Iron Throne itself. Will they succeed or will they stumble and fall? Only time and perhaps a few dragons will tell.