Global financial turmoil is turning up the heat on the Bank of Japan, raising the question of how much pain it can take before it is forced to act.
The BOJ faces two market-driven problems as the U.S.-China trade war escalates — a strengthening yen and sliding government bond yields. Its options for responding are limited, both in number and in effectiveness, and would come with unwelcome side effects.
But if the U.S. and China don't pull back, the yen is likely to get even stronger, threatening BOJ Gov. Haruhiko Kuroda's quest to return inflation to normal levels. And 10-year Japanese government bond yields could slide beyond the BOJ's targeted trading range, calling into question its control of yields and inflicting more pain on banks, which could respond by pulling back on lending.