Is Japan Losing the Inflation Battle?

July 25th, 2014
in econ_news, syndication

Econintersect:  On the surface it would seem that Japan is well on its way to higher inflation.  Core inflation was reported for June  to be 2.3% for the past year, and up 3.6% including perishables and energy.  This was the third month in a row that the overall inflation rate was 3.4% or higher.  These numbers are well above the 2% target of the Bank of Japan and at levels last seen in Japan 23 years ago.  But the nominal numbers are not at all what they might seem.


Follow up:

The following graph from Trading Economics shows the apparently astonishing spike of CPI (Consumer Price Index) for Japan in the most recent three months to levels not seen since late 1991.


The following graph shows the CPI numbers for the past 12 months and gives some meaningful insight into what is going on.


We see that the April CPI marked a jump of 1.8% (and May 2.1%) from the March reading.  The only problem with this is that the jump actually indicates a decline in inflation to a rate less than 1% year-over-year (or less, see discussion below).  This is because the Japanese consumption tax jumped from 5% in March to 8% in on April 1.  If this fed through exactly to prices paid by consumers then the last three readings would effectively be 0.4% (April), 0.7% (May) and 0.6% (June), with the extra 3% not going to the real economy but into the Japanese government Treasury.

Marcel Thieliant, a Singapore-based economist at Capital Economics, was quoted by Bloomberg:

"The data suggest that firms have now mostly passed on the higher sales tax, and inflationary pressure has started to diminish.   Underlying inflation will fall below 1 percent in coming months."

But is it already below zero (return to deflation)?  The assumption is that most of the 3% consumption tax hike could pass through to consumer prices.  But it could be higher.  Because the tax acts much like a value added tax it is imposed at every level of production on the output.  Last year a GEI News article estimated that the old 5% tax actually removed up to 7.4% of the final consumer price as accumulated taxes.  The increase to 8% could actually add up to an additional 1.5% in accumulated taxes above the nominal 3%.

If only half of the accumulated value add tax is realized across the entire economy, Japan is experiencing deflation right now once the correction is made to remove the tax increase.

A number of other factors weigh on the CPI situation.  Electricity is included in the core inflation number and it has been inflating by approximately 10-12% recently, effected primarily by the devaluation of the currency driving the yen price of imported fossil fuels up sharply.  Another negative factor for CPI outlook is the flat-lining of wages which have not been increasing.  Izumi Devalier, Japan economist at HSBC Holdings Plc in Hong Kong, commented on this on Bloomberg:

"Falling real income is going to weigh on consumption in the second half of the year.  It's not looking good for Japanese consumers right now."

Abenomics (the policies of Prime Minister Shinzo Abe) looks to be a mess right now.  As GEI News noted a year ago:  Aggressively easing monetarily while aggressively raising taxes is a conflicted policy.  The question was asked:  "How conflicted can you get?"  The answer is now playing out.


Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved