Deflation in Japan?

Japan.jpgI am now back from my retreat on the north shore of the St Lawrence River and ready to get back into it. Even in a week the econsphere produces so much interesting content and Bloomberg, the FT, The Economist etc churns out many an article. In short; I won't even try to play catch up here but still how can I resist ... 

My discourse on Japan should be well known to regular readers of this blog and it basically hinges on what now clearly seems as the folly of those who has consistently claimed Japan to be under way towards a sustainable recovery. One of the most striking features of the optimists' narrative has been that deflation now certainly is a thing of the past ever since the BOJ chose to end the ZIRP (zero-interest-rate-policy) back in March. Indeed, those of us who followed the mainstream economic commentary before the summer break were hard at work to try to differentiate the almost blind faith in the Japanese return. So how is in fact the CPI index fairing in Japan?

Core consumer prices rose 0.2 per cent in September, less than expected, suggesting that Japan has not yet moved decisively out of deflation.

The yen weakened against both the euro and the dollar as markets gambled that the weaker than expected inflation number would make it harder for the Bank of Japan to raise rates again this year. The currency fell to a record low against the euro of Y150.8 and to Y118.5 against the dollar.

Analysts say the yen’s weakness is partly explained by the carry trade, in which investors borrow in Japan, where interest rates are ¼ per cent, and buy higher-yielding assets abroad.

Richard Jerram, economist at Macquarie Securities, said: “This tells you that there’s still very, very little inflation in the economy.” But he said that, with the prospect of inflation edging up from November, the BoJ might still press ahead with another quarter-point rate rise before the year’s end.


As you can see it is hard to find the inflation in Japan but obviously cafe lattes from Starbucks are always a good place to start I guess.

Elsewhere, there are some tentative signs of mild inflation. Next month, Starbucks will raise prices for the first time since it opened in Japan 10 years ago, with a short latte due to go up from Y340 to Y360. Tokyo utility companies have announced price rises of 1-2 per cent, while the trucking association is pushing for a price increase of 10-20 per cent.

However, energy prices could be the decisive factor. Jesper Koll, economist at Merrill Lynch, said that, if oil prices continued to fall, the inflation rate could turn negative again next year.

Mr Jerram said the potentially large impact of individual items such as telephone charges, rice and oil on the CPI showed there was a “low cushion against renewed consumer price deflation”.

In essence, the article says it all but on the back of this very low inflation enviroment I can hardly see anyone arguing with certainty that Japan has decisively escaped the claws of deflation. This is also my main gripe with the general analysis on Japan; why don't people bother to take a step back and look at some of the salient trends of the Japanese economy and society with the world's oldest population and workforce. It seems clear to me that Japan as an economy faces structural challenges greatly influenced by the demographics of the Japanese society and any economic analysis which at least does not take this question into account is not worth anything I am sad to say. This is obviously a two-way street and boiling the Japanese economy down to only demographics would be a mistake, but given the population trends of Japan a mistake far less grave than neglecting the demographic narrative all together.