Inflation is coming to Japan, amid falling yen, inflation subsidies. Bank of Japan blows it off like “Transitory”, throwing the yen under the bus
The Japanese people are not entertained.
By Wolf Richter for WOLF STREET:
OK, so here we go. The overall consumer price index for all goods in Japan jumped by 0.4% in April from March, the third month in a row by 0.4% increase (4.8% on an annual basis), and by 2.5% from a year ago, up from an increase of 1.2% last month, the Japan Bureau of Statistics reported today.
The Japanese people are not entertained.
Food prices rose by 4.0% from year to year, including fresh food (+12.2%), driven by the most important categories of fresh seafood (+12.1%) and fresh vegetables (+12.2%).
“Fuel, light and water taxes” increased by 15.7% from year to year, including electricity (+21%), gas to the home (+17.5%) and “Other fuel and light” (+26.1 %).
Prices of durable household goods, such as furniture and white goods, rose by 5%.
The now-concluded price wars among wireless operators continued to keep the overall inflation rate low: the “communications” index fell by 10.9% year-on-year, but these price wars had peaked last year, with the sharpest fall from month to month. in April 2021 (-24% from March). The year-on-year decline peaked at over 34% in December. Recent month-on-month changes indicate that prices have leveled off. And going forward, this category’s downward pressure on the overall price index will disappear, and the other price increases may bear the brunt.
Wholesale inflation is blowing out. On Monday, Japan’s wholesale price index for April was published, and it increased by 10%, the worst jump in at least 40 years, as inflationary pressures build up in the pipeline.
Inflation subsidies, of course. The government has adopted a number of inflation packages, including one-off cash disposals of 50,000 yen ($ 391) per child to low-income families to help them pay for the higher prices.
Inflation subsidies also include cash payments to petrol wholesalers and distributors so that they will lower petrol prices, which will lower retail prices of petrol and thus the inflation index for petrol prices. The size of the grants is adjusted weekly.
Subsidizing wholesalers is an ingenious move because it pushes down the retail price of petrol, and thus the inflation index, which then makes the overall consumer price index seem less bad. These subsidies to wholesalers have been in force since early this year, and the inflation index would have looked worse without them.
Healthcare “inflation” largely determined by the government: pushing it down. Health insurance and health care in the United States are huge budget items for Americans, and inflation has been widespread. This is not the case in Japan, which has a state health insurance system for universal coverage, financed by taxes and individual contributions. Registration is required, either work-based or residence-based. The amounts the Japanese pay directly for health services (co-pays, etc.) are small, compared to what the Americans pay. And much of the cost to the consumer is determined by the government.
So, yes, the price index for “medical services” fell 1.8% year-on-year in April, the sharpest decline in many years. The index for “medicines and health enhancement” rose 1.2% year-on-year. The index for “Medical devices and apparatus” fell 0.3% from the previous year.
The core inflation index – “All food less fresh food” in Japan – rose by 0.4% in April from March, after jumping by 0.5% in March, and by 0.4% in February (average of 5.2% on annual basis). Year-over-year, it rose by 2.1 percent.
Bank of Japan: It’s just transient, throwing the yen under the bus.
The “all items less fresh food” index is the target used by the Bank of Japan for its 2.0% inflation target – or as it calls it, the “price stability target”. For years, the BoJ has justified its money pressure orgy based on the fact that this measure has largely been below 2%. And when it went above 2%, the BoJ blew it off because of what it calls its “obligation to exceed inflation.” And it says: “With this commitment, the bank aims to increase the credibility of achieving the price stability target of 2 percent among the public.”
So, faithfully, the BoJ has blown off the inflationary pressure, and has said, in the best Powell imitation, that this pressure is only “temporary.”
“It is not necessary to tighten monetary policy in response to a transient trend, as opposed to a sustained one,” BoJ leader Haruhiko Kuroda told a nervous parliament in April.
The yen has plummeted all year (except for a bounce the last few days), This is where part of the inflationary pressure comes from, as the falling exchange rate of the yen against the dollar makes imported goods and raw materials, including food and energy goods, much more expensive.
The yen has plunged against the dollar because the BoJ refuses to deviate from its negative key policy rate and interest rate curve, even though the Fed is now struggling with inflation and US interest rates have shot higher. Given the ruthlessness of the BoJ, the yen has paid the price, and the BoJ has thus contributed to importing inflation.
But to its credit and despite all its endless money-writing rhetoric, the BoJ effectively ended its aggressive program of buying government bonds by the end of 2020, and holdings of Japanese government securities peaked in February 2021.
And it remains the pinnacle, despite a recent bout of bond purchases, as part of its yield curve control, to try to curb the 10-year yield that threatened to shoot past the BoJ’s upper limit of 0.25%. So the stock of Japanese government securities rose in April, but remained significantly below the February peak.
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