Even amid a global inflation wave, Japan remains unlikely to hit its goal

Even as prices for goods rise worldwide, Japan’s long-held bid to boost inflation remains a distant goal.

The government announced Friday that Japan’s core consumer prices, excluding volatile fresh food, dropped by 0.2% from a year earlier, marking 12 straight months of decline and highlighting a continuing challenge for the nation’s policymakers.

Thanks to pressure from Prime Minister Yoshihide Suga’s administration on Japan’s major carriers to lower monthly smartphone charges, mobile phone fees dropped by 39.6%, a major factor in the lower inflation rate. Energy prices climbed by a combined 5.8%, with gasoline and kerosene increasing by 19.6% and 25.2%, respectively, due to soaring crude oil prices.

Accommodation fees rose 17.3%, as the government was promoting its travel subsidy program known as Go To Travel at this time last year.

Excluding fresh food and energy prices, the inflation rate fell by 0.6% from a year earlier.

Although it remains sluggish in Japan, the acceleration of inflation has emerged as a fresh concern abroad.

Vaccination rollouts have allowed some major countries to rebound from the economic fallout of the coronavirus pandemic, with pent-up demand and supply constraints triggering a surge in prices globally in recent months.

In the U.S., consumer prices spiked by 5.4% from a year earlier in June and July, the highest jump since August 2008. The eurozone saw a 2.2% inflation rate in July, topping the 2% target by the European Central Bank.

Some might wonder if that inflation wave will reach Japan, where the government has been trying to boost inflation for nearly a decade, but economists say consumer prices are unlikely to be affected regardless.

“In Japan, the idea that prices basically don’t go up is deeply rooted (among consumers),” said Toru Suehiro, senior economist at Daiwa Securities.

“In that sense, it might be a good experience for Japan if consumer prices temporarily rose due to soaring demand along with the reopening of its economy just like the United States. But the chances are looking grim at this point.”

The Bank of Japan has long struggled to achieve its 2% inflation target despite ultraloose monetary policies since Gov. Haruhiko Kuroda took the helm in 2013.

Higher prices of products overseas and globally surging commodity prices have amplified costs for Japanese companies that rely on importing goods.

This has led some domestic firms whose products get directly hit by surging prices of raw materials to hike the prices of their own products — covering everything from flour and pasta to mayonnaise. In July, wholesale prices actually jumped by 5.6% from a year earlier — the biggest gain in 13 years.

But consumer prices in the country are nowhere close to being in sync with the global trend, and many firms are likely to remain reluctant to hike prices.

“At this point, we are not seeing companies passing on increasing costs to their end products for consumers,” said Shunsuke Kobayashi, chief economist at Mizuho Securities.

“Now may be the toughest time for companies that sell goods or provide services for consumers, since Japanese consumers are sensitive to price hikes.”

Daiwa Securities’ Suehiro said that since companies are shouldering the rising costs, the damage to consumers prices may be limited, but it will hurt companies’ earnings, which could then be reflected in consumers’ wages.

As for the possibility that a reopened economy props up inflation, Suehiro says that scenario is unlikely, noting recent data that implied Japan would not see explosive pent-up demand even if it fully restarted the economy.

According to government data on the country’s gross domestic product in the April-June quarter, consumption unexpectedly increased by 0.8% from the previous quarter. Economists had projected that it would record zero growth, as Tokyo and some other prefectures were placed under a state of emergency.

However, as people have adjusted to life amid the pandemic and state of emergency measures become less effective in limiting people’s movement, consumers have already started spending again — even under the emergency.

This suggests that unlike the U.S., which has seen a sharp rebound in consumption in a short period of time, Japan’s consumption will likely recover at a moderate pace over the next several months or year.

In that case, “when the economy fully reopens, the level of consumption will probably have gone back to normal already … so I think there won’t be this friction (between supply and demand) to shoot up prices,” Suehiro said.

The BOJ has said prices are expected to rise once economic activities gain momentum, but inflation would not hit its 2% target before 2024.