Inflation is coming to Japan, amid falling yen and inflation subsidies.  Bank of Japan wins as 'transitional', throws yen under bus

Inflation is coming to Japan, amid falling yen and inflation subsidies. Bank of Japan wins as ‘transitional’, throws yen under bus

The Japanese are not amused.

By Wolf Richter for WOLF STREET:

OK, so here we go. The headline consumer price index for all items in Japan jumped 0.4% in April from March, the third consecutive month of increases of 0.4% (4.8% annualized) , and 2.5% compared to a year ago, against an increase of 1.2. % over the previous month, the Japanese Bureau of Statistics reported today.

The Japanese are not amused.

Food prices jumped 4.0% year-over-year, including fresh food (+12.2%), driven by the all-important fresh seafood (+12.1%) categories ) and fresh vegetables (+12.2%).

“Fuel, light and water charges” increased 15.7% year over year, including electricity (+21%), gas for the house (+17, 5%) and “Other fuels and lighting” (+26.1%).

Prices for household durable goods, such as furniture and appliances, jumped 5%.

The now over price wars within the mobile operators still kept the headline inflation rate down: the “communications” index fell 10.9% year-on-year, but these price wars peaked last year, with the biggest month-over-month decline. in April 2021 (-24% compared to March). The year-over-year decline peaked at more than 34% in December. Recent month-over-month changes indicate that rates have stabilized. And in the future, the downward pressure of this category on the overall price index will dissipate and other price increases may prevail.

Wholesale inflation explodes. On Monday, Japan’s wholesale price index for April was released, and it jumped 10%, the worst jump in at least 40 years, as inflationary pressures build in the pipeline.

Inflation subsidies, of course. The government enacted a series of inflation-fighting programs, including one-time payments of ¥50,000 ($391) per child to low-income families to help them pay the higher prices.

Inflation subsidies also include cash payments made to gasoline wholesalers and distributors to reduce their gasoline prices, which would reduce retail gasoline prices and therefore the index of gasoline price inflation. Grant amounts are adjusted weekly.

Subsidizing wholesalers is an ingenious move because it lowers the retail price of gasoline, and therefore the inflation index, which makes the overall consumer price index less bad. These subsidies for wholesalers have been in effect since the beginning of this year, and the inflation index would be worse without them.

“Inflation” of health decided largely by the government: bring it down. Health insurance and health care in the United States are huge budget items for Americans, and inflation is rampant. This is not the case in Japan, which has a public health insurance system for universal coverage, financed by taxes and individual contributions. Registration is compulsory, either depending on the job or depending on the residence. The amounts the Japanese pay directly for health care (co-pay, etc.) are small compared to what Americans pay. And much of the cost to consumers is determined by the government.

So, yes, the price index for “medical services” fell 1.8% year over year in April, the steepest drop in years. The “drugs and health enrichment” index rose 1.2% year-on-year. The “Medical Supplies and Devices” index fell 0.3% year-on-year.

The core inflation index – “All items less fresh produce” in Japan – jumped 0.4% in April compared to March, after jumping 0.5% in March, and 0.4% in February (average of 5, 2% annualized). Year-on-year, it jumped 2.1%.

Bank of Japan: It’s just transitory, throw the yen under the bus.

The “All items less fresh food” index is the measure the Bank of Japan uses for its 2.0% inflation target – or, as it calls it, its “price stability target”. The BoJ has justified its orgy of money printing for years on the basis that this measure was generally below 2%. And when it broke above 2%, the BoJ blew it up because of what it calls its “inflation overshoot commitment.” And he says, “With this commitment, the Bank aims to build credibility for the achievement of the 2% price stability objective with the public.”

So, true to form, the BoJ made inflationary pressures go away and said, in Powell’s best imitation, that those pressures are only “transient.”

“There is no need to tighten monetary policy in response to a transitory trend, as opposed to a sustained trend,” BoJ chief Haruhiko Kuroda told a jittery parliament in April.

The yen has plunged all year (except a rebound in recent days), hence some of these inflationary pressures, as the fall in the exchange rate of the yen against the dollar makes raw materials and imported raw materials, including food and energy products, much more expensive.

The yen plunged against the dollar because the BoJ refuses to change its negative policy rate and control of the yield curve, even as the Fed now grapples with inflation and US yields have soared. Given the BoJ’s recklessness, the yen paid the price, and the BoJ thus contributed to importing inflation.

But to its credit and for all its endless money-printing rhetoric, the BoJ effectively ended its aggressive government bond buying program at the end of 2020, and its holdings of Japanese state peaked in February 2021.

And it’s still the peak, despite a flurry of bond buying recently, as part of its yield curve control, in an attempt to cut the 10-year yield that threatened to breach the upper bound of 0, 25% of the BoJ. Thus, holdings of Japanese government securities increased in April, but remained significantly below the peak in February.

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