Business / Economy

Kuroda's inflation optimism challenged by cash register data

by Chikako Mogi and Shigeki Nozawa


Bank of Japan Gov. Haruhiko Kuroda’s optimism that he can meet the 2 percent inflation target is getting a reality check at the nation’s cash registers.

Analysis of scanner data for about 350,000 products at 300 supermarkets across Japan shows costs are falling, says Tsutomu Watanabe, an economics professor at the University of Tokyo.

Government data released Friday, meanwhile, showed that gains in consumer prices excluding fresh food slowed for a seventh month in February to a one-year low.

The cost of cereals, household durable goods and rents fell last month from a year ago, the data showed.

The bond market is also betting that Kuroda won’t be able to meet the inflation goal during the fiscal year starting in April. The break-even rate, which signals bond investors’ inflation expectations, remains at half the BOJ’s target. Sovereign debt has recouped most of the losses it made last month as global central banks responded to slumping commodity prices by keeping monetary policy easy.

“It’ll take at least two to three more years for inflation expectations to be anchored stably at 2 percent,” Watanabe, a former BOJ official, said last week. “Prices didn’t fall sufficiently during the deflation years, with wages probably putting a floor, and that created a huge gap between where prices should have been and where they actually stayed.”

Consumer prices excluding fresh food climbed 2 percent in February after gaining 2.2 percent in January, Friday’s government report showed, compared with a median estimate for a 2.1 percent increase in a Bloomberg survey of 32 economists. The BOJ’s measure that strips out last year’s consumption tax increase showed inflation at zero.

Prices, which fell 0.4 percent in April 2013 at the start of Kuroda’s term, have gained at a slower pace for almost every month since peaking at 3.4 percent in May 2014. The University of Tokyo’s measure tends to be about 0.5 percentage point lower than the CPI, Watanabe said.

Japanese government bonds completed a 10-month advance in January as the slowdown in inflation continued, even as Kuroda pledged to expand the nation’s monetary base at an annual pace of ¥80 trillion.

The Bloomberg Japan Sovereign Bond Index rose 0.5 percent this month, recouping some of the 0.7 percent loss in February. The 10-year bond yield touched a record low of 0.195 percent in January.

“It’s impossible to stably sustain 2 percent inflation in Japan. One percent may be possible but 2 percent is not,” said Makoto Yamashita, a strategist for Japanese interest rates at Deutsche Securities Inc. in Tokyo. “Globalization makes it difficult for the price of goods to rise much.”

There are signs that Kuroda’s effort to keep Japan out of a deflationary spiral is making progress.

Union members are on course to get a pay increase of about 2.4 percent, the biggest in 17 years, the Japanese Trade Union Confederation (Rengo) said March 20. Ichibanya Co., which runs a nationwide restaurant chain, said in February it plans to increase prices of toppings for curry dishes by as much as 16 percent from this month.

Making people realize that prices need to change is the key to sustaining inflation, said Watanabe. In the past, many small businesses such as barber shops have been reluctant to charge less, because they want to avoid cutting wages, he said.

“Over the long period, maintaining the same price and not cutting became a sort of default price-setting mechanism and that’s not easy to change in just a few years,” Watanabe said.

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