With prices that continue to decline, Japan is bucking the global trend of rising inflation — a disconnect that could split its policy stance away from the trajectory of other major economies and further weaken the yen.
While one measure of inflation in the United States hit 4.2% in April, its highest in more than 12 years, a key indicator of consumer prices in Japan dropped 0.1% from a year earlier as falling cellphone charges countered rising energy costs.
With companies in Japan so cautious about passing higher costs on to their customers, the gulf in price moves is set to continue for now — an outcome that could ultimately help an economy teetering on the edge of double-dip recession, by making its currency weaker.
“When it comes to inflation there’s none of it to worry about in Japan,” said Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research & Consulting. “Raising prices now could be a fatal mistake for Japanese companies, even with soaring commodity prices. It’s a very different situation from the U.S.”
Makoto Okazaki, the manager of Ishizaka, a small noodle manufacturer in Tokyo, is among those reluctant to hike prices. Wheat costs are rising, but he’ll do everything he can to avoid putting up his own prices, he said.
“If the cost of wheat keeps going up I may have to eventually raise prices, but I really don’t want to do that when everyone is having a such a hard time under COVID,” said Okazaki, who has worked at the firm for about 40 years. “That’s one tough call to make.”
The stance of Okazaki and other business operators reflects an entrenched mindset that has built up since the late 1990s, as people got used to repeated spells of falling prices and meager wage gains that fed a vicious cycle of companies absorbing rising costs at the expense of profits and pay increases.
BOJ Gov. Haruhiko Kuroda said he would transform this deflationary mindset when he took the helm of the bank in 2013. Eight years of massive stimulus later and the logic of static prices and minimal wage gains still largely holds true.
Kuroda himself admitted as much on April 27, when the BOJ released its latest inflation projections showing for the first time that the 2% price goal still won’t be in sight when his term ends in 2023.
The administration of Yoshihide Suga isn’t helping either. Rather than pursuing the inflation goal with the initial zeal of his predecessor Shinzo Abe, the pragmatist in Suga is looking to put more money in voters’ pockets via cheaper cellphone bills ahead of an election later this year.
The 26.5% slide in mobile phone service charges in April dragged down overall inflation by half a percentage point.
With price growth so far from its 2% target, the BOJ will need to keep its stimulus rolling for longer — in contrast to the U.S. where some Federal Reserve officials are already talking of their openness in the future to discussing the tapering of support for the economy.
Even if the Fed is still a way off dialing back its measures, as indicated by Jerome Powell, the impression of eventual policy divergence could be enough to soften the yen further. That’s an outcome that would help Japan’s biggest exporters.
The perceived divergence in policy trajectory has already helped the yen to weaken the most among major currencies this year, offering a critical boost to Japan’s export-reliant recovery.
A weaker yen doesn’t directly benefit everyone in the economy, especially importers, but it is one of the most important factors that has helped improve corporate performance and spur an economic expansion in recent years.
“You could say that the BOJ is actually helping the economy by failing to achieve its target,” Kobayashi said. “Because that helps keep the yen weak.”
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