The case of the oddly calm inflation rate

INFLATION ON THE RISE around the world, with price increases now exceeding central bank targets. but Japan is a notable resistance. Although policy makers have long sought to generate inflation, consumer prices still refuse to budge. In October, they only rose 0.1% year on year, and inflation, excluding fresh produce and energy prices, actually fell 0.7% over the same period. By comparison, a “core” measure rose 4.6% in America in October, 3.4% in Great Britain and 2.9% in Germany (see graph).

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What is happening? Japan is not immune to global trends. In October, producer prices rose 7.9% year-on-year, the largest increase since 1980. The recovery was mainly due to rising import costs, which rose 38% in yen. Prices for petroleum products and lumber rose 45% and 57%, respectively, from the same month last year.

These increases may have been partially offset by an idiosyncratic factor. Falling mobile phone costs, driven by a government campaign against operators, are pushing down the consumer price index as a whole. The communication segment of the basket is down 34% over one year. Yet even if fees were stable, inflation would still be below target. This suggests that broader economic factors are an important part of the story.

The entrenched expectations accumulated over decades of low or no inflation play a large role in explaining why rising production costs have not passed through to consumer prices. Domestic firms are notoriously unwilling to pass increases in import prices on to consumers. At a press conference in October, Kuroda Haruhiko, the governor of the Bank of Japan, attributed the reluctance to habits developed during the country’s periodic deflation episodes. Businesses have good reason to resist increases. Last week, Kikkoman, a soy sauce producer, announced a 4-10% price increase from February. Such an event could hardly be noticed in America. But in Japan, it made national news.

Another crucial factor is the weak recovery in consumption in Japan. Private spending fell in the third quarter of the year, and is now 3.5% lower than it was at the end of 2019. Durable goods spending, the source of US inflation, is practically stable for eight years in Japan.

The Bank of Japan was one of the first to adopt zero interest rate policies and bond purchase programs, tools that have since been used elsewhere in the wealthy world as interest rates rise. reached their lowest after the global financial crisis of 2007-2009. Japan’s absence of the same inflationary pressures apparent in other advanced economies once again makes the country a laboratory for economists.

Despite the activism of the Bank of Japan, inflation has still not reached its 2% target. Its assets amounted to 103% of the Japanese nominal GDP even before the pandemic, and bond and stock purchases since have pushed that share to 134%. In the same period, Federal Reserve purchases increased from 19% to 36% of U.S. purchases GDP. The Bank of Japan’s policy of keeping ten-year government bond yields at around 0% is still firmly in place, although a similar effort to control the yield curve by the Reserve Bank of Australia was discontinued after coming under market pressure in October. .

This suggests that anything that raises prices elsewhere – whether it be supply-side constraints associated with the pandemic, stimulating demand, or a combination of the two – the easing Monetary alone struggles to shake things up when faced with decades of low inflation. expectations. Kishida Fumio, the new Japanese prime minister, has pledged to roll out a fiscal stimulus package that includes money for poor families and those under the age of 18. Analysts at Barclays, another bank, expect new spending worth 3.7% GDP.

This aid could well drive up inflation, if the money is actually spent by consumers rather than saved. But for now, Japan seems to be the place inflation has once again forgotten.

Editor’s Note: This article has been updated with the latest inflation figures for Japan

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This article appeared in the Finance & Economics section of the print edition under the headline “Land of Falling Prices”

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