Japan finally has an inflation pulse and the gains are much stronger than they first appear, a factor that could start to influence speculation over the Bank of Japan’s policy path.
While the first rise in key consumer prices in 18 months was just 0.1% in September, once the impact of slashed mobile phone fees is removed, core inflation is closer to 1.4%, according to a Bloomberg calculation.
The sharp reductions in cellphone charges stem from a campaign of public pressure on mobile carriers to reduce fees by former Prime Minister Yoshihide Suga.
Unlike the debate over whether accelerating inflation around the world is transitory, the impact of cheaper phones in Japan will be temporary and will drop out of data next spring, likely causing a sharp rise in the key inflation figure.
"When the effects of mobile phone fee cuts fade out in April, the inflation readings will jump up and people will have to recognize that inflation is happening even in Japan,” said Takuji Aida, chief economist at Okasan Securities.
Price growth at 1.4% would be the strongest in six and a half years.
While sharply higher commodity prices are the main driver of the uptick, there is anecdotal evidence that some businesses are carefully asking households to embrace higher price tags.
Nisshin Seifun, a flour mill company, announced a price hike last week. In search of understanding, it devoted a web page to explain the reasons with charts of the dollar-yen exchange rate and the rise in shipping costs.
Citigroup economists said Friday inflation could reach around 1.5% in spring next year when the phone factor disappears. In the case of a further rise in oil prices and a weaker yen, it could even hit 2%, analysts at Morgan Stanley wrote in a report Monday.
While those are big ifs, those kinds of readings could give the central bank scope for tweaking its policy settings.
"The BOJ might conduct adjustment to steepen the yield curve to some extent” in the second half of 2022, taking advantage of higher inflation to take a step aimed at ensuring financial system stability, Takeshi Yamaguchi and Hiromu Uezato of Morgan Stanley wrote in their note.
In July 2018, when Japan’s inflation was around 1%, the BOJ loosened its control of 10-year bond yields, a move that 79% of economists labeled as stealth tapering.
"I don’t think we are at a point where the BOJ should take action but we are at a point where we need to watch inflation very carefully,” said Nobuyasu Atago, former head of the price statistics division at the BOJ and chief economist at Ichiyoshi Securities.
"Once the market starts to realize that inflation is there and tests the level of the yield target, the BOJ could act in response to that by widening its band,” Atago added.
The bank has a 0% target for 10-year government debt and allows for movement of a quarter percentage point either of the figure.
Already inflation outside mobile phone costs is bringing pain for households. Last week, the nation’s gasoline prices climbed to a seven-year high, a burden that hits people outside Japan’s big cities harder because they tend to drive more and they are the ones most politicians represent.
If hints of inflation end up discouraging Japan’s price-sensitive people from shopping, just as the country lifts virus restrictions, that could drag on the recovery, an outcome Prime Minister Fumio Kishida will be keen to avoid.
Likely being aware of that risk, Kishida this week instructed his Cabinet to keep a close eye on price developments, with a national election just days away.
To be sure, Japan’s price trend has been hard to pin down due to government policy measures and a re-weighting of the consumer price basket in the summer.
The situation has been so confusing that the BOJ may have to sharply reduce its inflation forecast for this fiscal year to account for the amplified impact of the phone fees. Officials at the central bank are considering such a move, according to people familiar with the matter.
Inflation readings could also be further buffeted by government policy as restrictions on economic activity are lifted.
A suspended government discount campaign to boost the tourism industry could again play havoc with hotel prices if it is reinstated in the coming months, renewing another source of strong downward pressure on prices.
Still, while nobody expects inflation to run away in Japan, as it is threatening to do in the United States and some other economies, there are increasing signs that it could get up and walk.
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