Moments ago the Nikkei strategically leaked a report that the Japanese cabinet office, quite expectedly, will downgrade its economic assessment in its April report. "Expected" because as we reported, discretionary spending following the  sales tax hike, has gotten crushed. Also not unexpected, the USDJPY took the news in stride and posted a modest bounce in the face of today's relentless selling of the pair. Why? Because to algos and many asset managers desperate for even more training wheels from central banks (now that everyone has forgotten how to trade based soely on fundamentals), this means more QE from the BOJ right - after all horrible news for everyone is great news for the 1%.

Not so fast.

As the Japan Times reported yesterday paraphrasing Bloomberg, while the BOJ has succeeded in boosting inflation to near scorching levels, mostly for such "trivial" items as energy and food prices, it has failed miserably in raising wages which as we have been reporting, have failed to post even one increase in21 consecutive months! As a result, "Prime Minister Shinzo Abe’s bid to vault Japan out of 15 years of deflation risks losing public support by spurring too much inflation too quickly as companies add extra price increases to this month’s sales tax bump."

Said otherwise: more QE may well be the straw that breaks the camel's back of Abe's cabinet support, and unleashes another Imodium-inspired exit stage left for the premier whose second attempt at fixing Japan will surely fizzle as badly, if not worse, as his first one.

The report goes on:

Businesses from Suntory Beverage and Food Ltd. to beef bowl chain Yoshinoya Holdings Co. have raised costs more than the 3 percentage point levy increase. This month’s inflation rate could be 3.5 percent, the fastest since 1982, according to Yoshiki Shinke, the most accurate forecaster of the economy for two years running in data compiled by Bloomberg.

 

The challenge for Abe and the Bank of Japan is to keep the public focused on the long-term benefits of exiting deflation when wages are yet to pick up and, according to BOJ board member Sayuri Shirai, most people still see price gains as “unfavorable.” Any jump in inflation that’s perceived as excessive by a population more used to prices falling could worsen consumer confidence and make it harder to boost growth.

 

“Households are already seeing their real incomes eroding and it will get worse with faster inflation,” said Taro Saito, director of economic research at NLI Research Institute, who says he’s seen prices of Chinese food and coffee rising more than the sales levy. “Consumer spending will weaken and a rebound in the economy will lack strength, putting Abe in a difficult position.”

And something missing in central banker jargon: logic.

Accelerated inflation would squeeze households, with wages excluding overtime and bonuses declining in February for a 21st straight month, down 0.3 percent from a year earlier, according to April 1 labor ministry data. Saito, ranked No. 3 forecaster last year, sees the risk of a 3.6 percent increase in the April core consumer price index, which excludes fresh food but not energy, after a 1.3 percent gain in February.

Even Goldman is cited:

“Consumer sentiment has been undermined to a large extent by rising prices,” wrote Goldman Sachs Group Inc. economists Naohiko Baba and Yuriko Tanaka in an April 12 note, predicting “a major retreat in sentiment from April as the tax hike drives inflation.”

And the punchline for all the liquidity and bail out addicts:

An acceleration in inflation would mean it’s “very unlikely” the central bank will bolster stimulus, said Saito. Shinke said while faster price gains could prompt economists to push back the projected timing of further easing, BOJ policy will depend on the economy.

...

Shinke sees two potential paths for the economy after a inflation surge. Under one scenario, households cut spending, with a weak economic rebound from a slump after the sales tax hike putting “Abenomics” at risk. Under the other, consumer spending bounces back, supported by a tight labor market that lifts incomes.

 

“High inflation could push the economy either way,” said Shinke.

So while in this case bad news is certainly bad for the economy, the already scorching inflation will mean that just like the ECB, but for different reasons, the BOJ is now stuck - the economy is once again foundering but Kuroda suddenly finds himself unable to do much more to stimulate the "wealth effect" which has failed at boosting that all important component of bening inflation: wages.

Which means that all algos hoping for more horrible news out of Plan B Japan, which will provide at least a brief hiatus from the beta and momo selling, may want to be recalibrated, and to finally index their BOJ QE expectations to surging prices that threaten to send Japan into all out recession once again. A recession which most likely was assured with the April 1 tax hike anyway.

It also means that like the rest of the global central banks, Kuroda and Abe will be forced to talk up the chance of QE "any minute now"... however never actually dare to push the switch.