Japanese desire a little inflation
2% target so far remains elusive
Surging prices are haunting consumers and confounding economic planners in the U.S. and other countries, but not in Japan, where sparking inflation has proven an elusive goal.
While the Federal Reserve and most other central banks are shifting into inflation-fighting mode, the Bank of Japan on Friday said it would scale back corporate bond purchases to pre-pandemic levels. But it will continue pumping tens of billions of dollars into the economy in hopes of eventually attaining its elusive 2% inflation target and getting the economy to grow faster.
With outbreaks of the omicron variant of coronavirus looming in many parts of the world, “high uncertainties” persist, it said.
The chances of hitting that target anytime soon remain “slim,” Marcel Thieliant of Capital Economics said in a report. “The upshot is that the Bank of Japan will remain among the few central banks that won’t tighten policy for the foreseeable future.”
Inflation was 0.1% in October. Excluding volatile food and energy prices, it was negative. The Bank of Japan is forecasting 0% inflation for the fiscal year that ends in March.
By contrast, U.S. consumer prices grew 6.2% in October over the previous 12 months, the most in three decades.
During the pandemic, the Federal Reserve and other central banks unleashed a barrage of monetary stimulus similar to Japan’s, taking interest rates to record lows in some cases. Now that the U.S. and other economies are on the mend and prices are surging, the Federal Reserve and other central banks are moving to wind that down without snuffing out economic recoveries.
With U.S. inflation nearing a 40-year high, Fed policymakers on Wednesday announced plans to shrink the central bank’s monthly bond purchases twice as
fast as earlier planned. That puts it on a path to begin raising interest rates within the first half of 2022.
On Thursday, the Bank of England became the first central bank among leading economies to raise interest rates to fight inflation that rose to 5.1% in the year to November.
Some Asian central banks already had begun to raise interest rates. New Zealand’s has raised its benchmark interest rate in October and then in November, from a record low 0.25% now to 0.75%.
Japan’s economy began slowing in the early 1990s with the collapse of a financial bubble and has never really regained momentum. Companies are wary of hiring, raising salaries or investing, given the bleak growth outlook for a country whose quickly aging population is shrinking. Combating deflation, or falling prices, has been the priority.
For nearly a decade, the Bank of Japan has been buying huge amounts of government bonds and other assets to keep borrowing costs in the world’s third-largest economy near zero and, theoretically, entice consumers and companies to spend more to beat future price increases. The benchmark interest rate has been at minus 0.1% for years.
Rents are still roughly where they were 30 years ago and prices for most consumer goods have risen, but not by as much as elsewhere. With wages flat or falling and taxes rising, cautious shoppers tended to just tighten their belts.
“Japan’s inflation remains muted,” says Sayuri Shirai, a professor at Tokyo’s Keio University and former member of the Bank of Japan’s policy board.
Japanese retailers, restaurants and other businesses have been loathe to pass higher costs onto their pricesensitive consumers. Aeon, one of Japan’s biggest retail conglomerates recently announced a “price freeze” until the year’s end “as a way of supporting our customers at a time when prices for daily necessities are rising.”
But even Japan, which imports much of what it consumes, is not entirely immune to the surge in prices across the globe, and some of the higher costs being paid by consumers elsewhere may just be slow to catch up.
Wholesale inflation hit its highest level in 40 years in October, at 8%. Manufacturers and farmers are feeling the squeeze of rising costs, especially for fuel.
Costs for gasoline, and other fuels, electricity and gas rates have been creeping upward. Some food brands have announced plans to raise prices next year, to make up for the higher costs of imported wheat, potatoes and other commodities.
Car prices have nudged higher as automakers cut output because of shortages of components, Tom Learmouth of Capital Economics said in a report. He forecast that inflation will top 1.3% next year, but then fall back.
And then there is “stealth inflation,” known elsewhere in the world as shrinkflation, as manufacturers plump their profit margins by selling less of the same products — downsizing candy bars, boxed lunches, tissues and rice balls, for example — for the same prices, often claiming that smaller portions are more suitable and appreciated by Japan’s aging consumers.
Shirai also expects inflation to pick up somewhat, especially when the impact of reduced mobile phone fees this year disappears by next April.
“But it is difficult to see 2% inflation,” said Shirai. “Japan’s consumption remains weak and firms are not able to pass those costs fully on retail prices.”