Japan Death Spiral Update: Now Inflation Is Spiking

A bad set of choices

Pretend you’re running a central bank and your primary job is to maintain a stable currency. Then assume that your long-term interest rates are around 1% and an important inflation measure is spiking to near 3%. What do you do?

Normally, you’d raise interest rates to one or two percentage points above the rate of inflation, producing positive real intere…