Countering long-standing market consensus, the Bank of Japan could remain cautious, maintaining its ultra-accommodative policy stance in the face of quickening domestic inflation. A renewed rise in energy prices might generate a negative currency shock via a renewed deterioration in the country’s flow dynamics. Alternatively, an extended run of stronger-than-expected global activity data – potentially paired with persistently-sticky inflation – could lead to a widening in interest rate differentials (although we note that the likely negative implications for global growth and risk appetite could act to limit the extent of any yen weakness in markets).

World industrial indicators and Japanese yen