If inflationary pressures are building up in Japan, as they do in the U.S. or Europe, the BOJ will certainly react early. But with inflation pressures still limited in Japan because of low household demand, the BOJ will rather remain busy with mopping up liquidity and technical adjustments in the money market before they increase policy rates. It also seems smart to keep the government happy by waiting until it announces the end of deflation in September for its election campaigns.

We finally got some dynamism into the bond market. Interest rates have certainly risen faster on back of the strong economy and overseas tightening. But current sell-offs in the bond market also reflect a spillover of inflation expectation from the U.S. and EU. Inflation risks are still quite low in Japan, so demand for bonds will likely remain strong. Pension funds will pour more cash into bonds after stock market valuations are already quite high, and banks will start buying again to allow for higher interest rates on savings accounts.