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Inflation is returning to Japan

By Ichiro Suzuki In sympathy with a global trend, consumer prices in Japan are rising at last after a few decades of ultra low inflation that included some years of mild deflation. CPI in December rose 0.5% vs. a year ago and was up 0.2% in January. Still very low, but January was the fifth consecutive month of higher prices over 12 months ago after prices were in the negative territory through the end of last summer. Were it not for over 50% drop in mobile phone rates, inflation would have been higher. Last spring, then former Prime Minister Suga pressed carriers to lower their charges that stood out in global comparisons. So the size of phone bills came down materially in April, and this is one-off effect that disappears soon. The vast majority of those who live in Japan feels that prices are rising more in tune of the United States that has registered a 7.5% upswing in January. Price hikes are acute in food and energy, of course. These two items account for the bulk of of non-discretionary spending for households. Crude oil prices have been rising for structural reasons that seem to stick around for some time. Higher energy prices are translated into higher costs of intermediary goods that go into a variety of finished goods. Consumers are yet to see higher price tags on a greater numbers of items, food or else. Even though Japanese in general drive much less frequently and shorter distances than in many other countries, higher energy prices hit household finances hard. For Japanese consumers, this round of energy price surges are especially painful since it is taking place amid a weakening yen, unlike in the past when a stronger currency absorbed some of higher commodity prices quoted in the dollar. The Japanese yen was held to a fixed exchanged rate of 360 to the dollar until the late summer of 1971. Two years later, the Arab oil embargo exposed the global economy to the first oil shock. Since the yen went through four decades of relentless appreciation against the greenback or other world’s major currencies, higher exchange rates always alleviated shocks of higher energy prices. By the end of the first decade of the 21st century, WTI went from $3 per barrel to well over $100. During those four decades, the yen surged to 75 from 360 per dollar, making energy price hikes much much milder to consumers in Japan than to those elsewhere. In fact, gasoline price at 170 yen per litter ($5.7 per gallon) today is only 50% higher than it was 40 years ago, while it has tripled in the U.S. in the four decades. Amid export industries’ bitter complaint on the ever-rising yen, households benefited from it immensely. Not any more. Japanese consumers are bearing more than the full brunt of crude oil prices’ surge. The yen has not only stopped rising but also is falling against the greenback and other major currencies. The currency factor is now fueling price surges, reversing its former position of having been a shock absorber. Bank of Japan governor Kuroda’s goal of 2% inflation that once seemed wildly aggressive is now beginning to have some plausibility. While prices are rising, it is entirely another story whether workers receive long-awaited raises at last. Wages and salaries have hardly risen over the last quarter century amid mild deflation or negligible inflation. Consumers’ mindset is fixated on prices that never rise. They go on buyers’ strike on the slightest sign of price hikes. This was acutely displayed in three occasions of modest 2-3% hikes of consumption tax rate over the last 25 years. On the other hand, there was no such strike upon the introduction of the tax, at originally 3%, in April 1989, at the height of a booming economy that proved to be a massive bubble. There is no ‘great resignation’ in Japan. Despite a tight labor market, in part fueled by a ban on foreign workers’ entry into the country, people don’t change jobs for higher pay, preferring job security. This lack of labor market liquidity is immensely contributing to suppressed wages and salaries. In the meantime, Corporate Japan is not responding actively to PM Kishida’s call for raises for workers, since they are yet to be convinced that the latest economic rebound has a staying power. Nonetheless, inflation is here at last whether they get meaningful raises or not. About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.


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