The fall of Japan’s strangely calm inflation rate

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INFLATION IS RISING worldwide, with price increases now exceeding the targets of the central banks. But Japan is a notable holdout. Although policymakers there have long tried to create inflation, consumer prices still refuse to give way. In September they rose by only 0.2% year-on-year, and inflation excluding fresh food and energy prices even fell by 0.5% over the same period. Analysts at Goldman Sachs, a bank, expect this metric to drop to -0.8% in the latest data to be released after the data is released. In comparison, a “core” metric rose in October in America by 4.6%, in Great Britain by 3.4% and in Germany by 2.9% (see chart).

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What’s happening? Japan is not isolated from global trends. In October, producer prices rose 7.9% yoy, the largest single increase since 1980. The increase was largely led by higher import costs, which rose 38% in yen. The prices for petroleum products and sawn timber increased by 45% and 57% respectively compared to the same month last year.

These increases may have been partially offset by an idiosyncratic factor. Falling cell phone charges, triggered by a government campaign against cell phone operators, are dragging the consumer price index down overall. The communication segment of the basket fell by 28% compared to the previous year. But even if fees stayed the same, inflation would still be below target. This suggests that broader economic factors are an important part of the story.

Frozen expectations built by decades of little to no inflation play a large role in explaining why rising producer costs have not had an impact on consumer prices. Domestic companies are known to be unwilling to pass on price increases on imports to consumers. At a press conference in October, Kuroda Haruhiko, governor of the Bank of Japan, attributed this reluctance to habits acquired during the country’s periodic attacks of deflation. Companies have good reasons to oppose increases. Last week, Kikkoman, a soy sauce maker, announced a 4-10% price hike from February. Such an event may be barely noticed in America. But in Japan it made the national news.

Another key factor is the weakness of the consumption recovery in Japan. Private spending declined in the third quarter of the year and is now 3.5% below its late 2019 level. Durable goods spending, the source of much of American inflation, has remained virtually unchanged in Japan over the past eight years.

The Bank of Japan early adopted zero interest rate policies and bond-buying programs, instruments that have been used elsewhere in the rich world since when interest rates hit rock bottom after the 2007-09 global financial crisis. The lack of the same inflationary pressures as other developed countries in Japan makes the country a laboratory for economists again.

Despite the Bank of Japan’s activism, inflation has still not reached its 2% target. Its assets were 103% of the Japanese nominal value GDP even before the pandemic, and since then, bond and stock purchases have raised that percentage to 134%. During the same period, the Federal Reserve’s purchases are 19% to 36% of American GDP. The Bank of Japan’s policy of keeping 10-year government bond yields around 0% remains firmly entrenched, although similar efforts by the Reserve Bank of Australia to control the yield curve were abandoned after coming under market pressure in October.

This suggests that anything that raises prices elsewhere in the world – whether supply-side restraints related to the pandemic, demand-side incentives, or a combination of both – monetary easing alone is struggling to move the needle in the face of decades of low inflation Expectations. Kishida Fumio, Japan’s new prime minister, has promised to launch a fiscal stimulus package that will include cash for poor families and those under the age of 18. Analysts at Barclays, another bank, expect new spending worth 3.7% of GDP.

These handouts can well fuel inflation if the money is actually being spent by consumers and not saved. But right now, Japan seems to be the place that inflation has once again forgotten.

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This article appeared in the Finance & Economics section of the print edition under the heading “Land of falling prices”


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