Japan CPI: A New Era?

Overnight we’re likely to get an economic indicator that may signal the end of an era. The Japan national consumer price index (CPI) for April comes out. The market consensus forecast is that prices rose by 2.5% yoy during the month.

Why is this such a blockbuster indicator when, say, US inflation is 8.3% yoy and British inflation is 9.0%? Because except for three brief months in 2008, this is expected to be the first time since 1993 that it’s over the Bank of Japan’s 2% target without a hike in the consumption tax. (Obviously if you raise the consumption tax, aka sales tax, by 2 percentage points, consumer prices will generally rise by 2 percentage points too, so that doesn’t count as inflation.)

The reason for this is that the huge decline in mobile phone charges that took place in April 2021, which has been depressing the overall CPI, will finally fall out of the calculation.

Can we expect fireworks in Nihonbashi, the area of Tokyo where the Bank of Japan is located? Does this presage a change in the Bank of Japan’s ultra-loose monetary policy, which has kept the world supplied with cheap liquidity since 1995? Hardly. The Monetary Policy Board has shown no interest in joining the global tightening trend. The Summary of Opinions from the April Bank of Japan meeting showed that most members remain skeptical about whether inflation will remain sustainably above their 2% target so long as the output gap -- the difference between what Japan can produce and what it does produce -- remains wide. Some members are still worried about the downside risks to inflation!

Note too that the “core-core” rate of inflation (grey line), excluding energy and fresh foods (same as core inflation in other countries), is expected to be up only +0.7% yoy. This is a big turnaround from deflation of -0.7% yoy in March but still it’s hardly the kind of rise that’s causing panic in central banks in other countries.

ECB President Lagarde was asked back in April about the Fed’s policy vs the ECB’s. She replied that “Comparing our respective monetary policies is comparing apples and oranges. We are not applying policies to the same economic situations at all.” Japan’s situation is an even bigger international outlier.

The press will probably pounce upon the number and ask why the BoJ is still running such an expansive policy. The Cabinet Office’s monthly survey shows that 93% of Japanese think prices will be higher a year from now, the highest since the survey began in 2004. Believe it or not, many Japanese are starting to get uncomfortable with inflation as food prices rise. I think we can probably expect some speeches to explain the BoJ’s policy to the world, but not yet any change in policy.

This may change from now on if inflation stays above their 2% target. The first thing I would look for would be a widening of the band in the BoJ’s “yield curve control” program, which keeps the benchmark 10-year yield within a ±25 bps range of 0.0%. But it will be a slow process. Meanwhile, the fundamental factor that keeps the yen weak – the interest rate gap between Japan and the rest of the world – will remain. We may well see the return of “the yen carry trade” and further yen weakness as Japan sits out this round of global tightening.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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