Is An 18% JPY Devaluation The 'Best-Case' Scenario For Abe's 'New' Japan?

The JPY dropped 1.3% against the USD this week for a greater-than-6% drop since its late-September highs as it appears the market is content pricing Abe's dream of a higher inflation-expectation through the currency devaluation route (and not - for now - through nominal bond yields - implicitly signaling 'real' deflationary expectations). In a 'normal' environment, Barclays quantified the impact of a 1ppt shift in inflation expectations from 1% to 2% will create a 'permanent inflation tax' of around 18% (which will be shared between JPY and JGB channels). However, as we discussed in detail in March (and Kyle Bass confirmed and extended recently), the current 'Rubicon-crossing' nature of Japan's trade balance and debt-load (interest-expense-constraint) mean things could become highly unstable and contagious in a hurry. When the upside of your policy plans is an 18% loss of global purchas...