The Bank of Japan’s Early Warning for the U.S.

Obsessing over the Federal Reserve is understandable, but the Bank of Japan’s decision this past week to relinquish control over government bond yields is a reminder that investors ignore other central banks at their peril.

Deflation has weighed on Japan since a real estate bubble burst in the early 1990s. The BOJ pioneered “quantitative easing”—stimulating growth through bond-buying—in 2001 and pushed interest rates into negative territory in 2016, when it began a policy of controlling the yield curve for government bonds.

The language tweak might seem minor, but the implications are potentially seismic for markets. BOJ Gov. Kazuo Ueda said the central bank would allow for long-term yields to rise if driven by fundamentals, but that it would respond to speculative moves with intervention.

Inflation is also more reliably around, or even above, the BOJ’s 2% annual target, which could push the central bank to begin tightening the ultraloose screws. Its policy board lifted its inflation expectations on Tuesday, seeing inflation holding above 2.8% in the 2024 fiscal year, up from estimates of 1.9% in July.

Marcel Thieliant, head of Asia Pacific at research group Capital Economics, expects an end to Japan’s negative interest rates as soon as January. Stealey sees the BOJ ditching yield-curve control as early as the spring, after annual wage talks between unions and employers.

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