(The opinions expressed here are those of the author, a columnist for Reuters.)

ORLANDO, Florida  - Although the Bank of Japan is raising borrowing costs and Japanese Government Bond yields are the highest in 15 years, "real" inflation-adjusted rates in the world's fourth-largest economy are actually negative and the lowest in years.

Given how much has been written about the BOJ's 'historic' rate-hiking campaign and the recent spike in JGB yields, one might think policy conditions in Japan are tightening. But that's not the case.

The real official policy rate in Japan is currently -3.5%, the lowest in two years.

That's because annual consumer price inflation in Japan is now 4%, higher than in the United States, euro zone and UK. This accelerating inflation – something of a novelty in Japan – indicates that financial conditions in the country are still extremely loose, despite the apparent hawkish shift in monetary policy over the past year.

This discrepancy could have significant implications for Japanese - and global - markets.

OUTLIER

The BoJ is the notable outlier among G10 central banks as the only one raising rates, even if it is taking an understandably cautious approach after decades of deflation and extraordinarily loose policy.

The market has, in turn, developed a persuasive narrative: the BOJ swimming against the global tide will lift JGB yields, attract domestic and foreign capital, and turbocharge the yen. Given that Japan is the world's largest creditor nation with a net $3.3 trillion of assets held overseas, the yen's upside is potentially huge.

Some of this story is playing out. The yen is up more than 5% against the dollar this year, making it the best-performing G10 currency. But as Bank of America analysts neatly point out, real yields and rates complicate the picture.

REALITY CHECK

Last week, BofA raised its year-end forecast for the 10-year JGB yield to 1.65% from 1.40% and lifted its BOJ terminal rate forecast to 1.5% from 1.0%. The BOJ's policy rate is currently 0.5%, the highest since the Global Financial Crisis.

Yet the BofA analysts also expect to see the yen fall to 165.00 per dollar by the end of this year, which would be the weakest level in almost 40 years.

That's because real interest rates matter to investors and businesses.

Yen deposits have lost their real value at an annualized rate of 3.6% over the past three years, they argue. And Japan's real policy rate is currently a full 500 basis points lower than the equivalent U.S. rate, and 530 bps below the equivalent euro zone rate.

Even if Japan's inflation halves to 2% and the policy rate doubles to 1%, the real policy rate would be -1%, still well below equivalent U.S., UK and euro zone real rates, which are all positive. So Japanese households may be tempted to seek higher returns overseas.

For domestic real rates to become attractive, the BOJ would need to tighten policy sharply or inflation would need to start slowing soon. Or both.

Given the BoJ's caution and the stickiness of inflation, that's a real tall order.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(By Jamie McGeever; Editing by Kirsten Donovan)