The concept of the “lost decade” in Japan which of course now encompasses at least two of them has many features but one of them is the lack of inflation. This has continued in spite of the enormous effort to create some driven by the Abenomics economic policy of the current government and the Bank of Japan. Or as James Mackintosh put it yesterday.
Japanese consumer prices are now at the same level as in October 1998. Not inflation, but the *level* of CPI.
So not quite two lost decades although care is needed because as regular readers will be aware my view is that the inflation obsession of the world’s central banks is misguided. After all the 2% annual target was something that seemed right rather than being a considered thought out plan.
If we move to more recent developments we see a familiar tale of not much going on as the annual inflation rate was 0.7% in June. The index based at 2015 levels is at 100.9. Even in an area where you would expect inflation which is medical services ( for an aging population) there is not much as it is 2% and 103.3 respectively. This is a world where the 100 Yen machine still exists and you get the same drink or chocolate bar you got years ago. The feature that sticks in my mind from when I worked in Tokyo was the gloriously named “Pocari Sweat” which tasted better than in sounds. Another feature that is different to the UK in particular is the housing sector where there is little or no inflation either as it registers a 0.1% fall in the last year and the index is at 99.6. That’s where it was in 1996!
The Bank of Japan
There have been developments here this week as it once again faces the prospect of failing with regards to it inflation target. This is analagous to Mario Draghi calling for reform in the Euro area which is also in every policy statement. This morning saw the release of its latest research into underlying inflation which of course central bankers love when the headline isn’t behaving. But if anything it makes things worse as we plough through the trimmed mean, the weighted median and the mode. If I was Governor I would be rather pleased to see the weighted median at 0% but Governor Kuroda of course is not.
Here is yesterday’s response described by NHK News.
The Bank of Japan has made a move to curb the recent rise in long-term interest rates.
BOJ officials said on Monday that they are offering to buy an unlimited amount of Japanese government bonds at a fixed rate.
There is a bit of hype in the use of “unlimited amount” as whilst Japan issues plenty of bonds the Tokyo Whale has gobbled quite a few up already. Also the yield movements are very Japanese.
On Monday morning, the yield on the benchmark 10-year government bond briefly hit 0.090 percent on speculation the central bank may review its bond-buying program at next week’s meeting. The BOJ’s target for the yield is around zero percent.
After the officials made the suggestion, the yield fell to 0.065 percent.
Firstly let us note the small difference here before we look at the Reuters perspective
The country’s government bond yields rose sharply on Monday, the first chance Asian traders had to react to a Reuters report that the central bank was debating whether to scale back monetary stimulus………Yields on the benchmark 10-year Japanese government bonds, or JGBs, shot up nearly six basis points on Monday before the central bank offered to buy unlimited amounts at a yield of 0.11 percent.
So returning to the yield issue it is not much but is better in real terms than in many places especially if you take a broad sweep of Japanese inflation. You may also note that the Bank of Japan more threatened to buy rather than actually buying. This is the new yield curve control programme which has seen its purchases slow. The hint it might step back has the problem that for so long it has pretty much centrally planned the Japanese Government Bond market which otherwise has withered on the vine.
There have been problems here too as we remind ourselves of what happened in the first quarter.
The economy shrank by an annual rate of 0.6 percent in the first quarter of 2018 as consumers kept their purse strings tight despite signs that paychecks are finally beginning to rise after decades of flat wages. ( Japan Times).
This morning’s PMI business survey for manufacturing has done little to improve the mood.
Japan Flash Manufacturing PMI falls to 20-month
low of 51.6 in July, from 53.0 in June…….New business grew at a much weaker rate and was broadly flat,
while export demand, despite further yen depreciation,
deteriorated for a second month running ( Markit ).
Actually these developments bring things more into line with the Bank of Japan in the sense that it felt the Japanese economy had outperformed in the previous 2 years.
However the labour market remains strong.
The unemployment rate fell to the lowest level in more than 25 years in May as companies ramped up hiring amid solidifying economic conditions, government data showed Friday……..The rate fell to 2.2 percent, against an estimated 2.5 percent, the lowest since 1992, the Internal Affairs and Communications Ministry said. Separate data released the same day by the labor ministry showed the job-to-applicant ratio was 1.6, the highest since 1974.
There was also a flicker from wage growth in May as bonuses boosted the numbers meaning that real wages were 1.3% higher than a year before. It has led t the usual flurry of excitement from the media desperate to justify all their past pro Abenomics headlines who presumably follow the advice of “look away now” at the previous months as 3 out of 4 showed negative annual growth. Still for fans of “output gap” style analysis it is an improvement from complete disaster to mere failure assuming it lasts. They would be expecting the equivalent of the 41 degrees celsius recorded near to Tokyo yesterday.
Actually the twenty years of being an inflation free zone has not gone that badly for Japan. Collectively the economic growth rate has been weak but individually it has done better as we see a positive spin on the falling population level. Personally I think that pumping up inflation to 2% per annum would be likely to inflict economic danger on Japan because if we look across to the west we see that the Ivory Tower assumption that wages would automatically rise in response is another error.
But as so often the cry for “More! More! More!” goes up as I note this from Gavyn Davies in the Financial Times.
Even with very careful communication and forward guidance, monetary policy may not be sufficient, on its own, to reach the inflation target. Eventually, unconventional fiscal easing may also be needed, though this is not remotely on the horizon at present.
So the monetary policy which apparently could not fail has so lets pump up fiscal policy. That starts from an interesting level of the national debt and from a curious view of where inflation has been.
Bank of Japan faces the return of very low inflation
How can you return if you never went away?