Japan’s policy trajectory threatens to burst China’s asset bubbles. Japan has devalued the yen competitively: US and European real exchange rates are down some 10 per cent since 2009, courtesy of quantitative easing and the euro crises. Surprise interest rate cuts in a number of countries hint at dangerous imitation. China is the most exposed: following Japan’s devaluation (echoed in Korea and elsewhere), China’s overvaluation has now reached an estimated 33 per cent.

At just more than Y100 to the dollar the yen is cheap enough to get Japan’s economy back to its trend level from 2.5 per cent below it, with growth of 3 per cent this year and perhaps 1 per cent in 2014, and to eliminate deflation. Sharp increases in import costs could raise CPI inflation to 2 per cent (the new long-run target) by year-end or early 2014, but domestic costs are now still falling.

That may stop by the end of next year, but CPI inflation could also fall back to zero unless there is a further yen devaluation, perhaps to Y120 versus the dollar. Inflation of 2 per cent is unlikely to last with the measures adopted so far.