Tokyo In Japan, the word inflation is not associated with fear, as it is in Europe and the USA, but rather with hope. Actually, the Japanese central bank hardly feels any pressure: In Japan, the core inflation rate rose to just 0.5 percent in December, driven by the weak yen and rising commodity prices. If you add in the more volatile prices for food and energy, the inflation rate was as high as 0.8 percent.
The US Federal Reserve, on the other hand, has to rein in price increases of up to seven percent, the European Central Bank by a good five percent.
However, with the moderate price increases for the third largest economy in the world, there are also signs of a turning point, albeit in the spirit of Japan’s government and central bank. The country appears to be on track to emerge from deflation after more than 20 years. Although the central bank still does not expect values that come close to the inflation rates in Europe or the USA, it does expect prices to rise permanently.
Just this week, the members of the central bank’s Monetary Policy Committee increased their inflation forecast for 2022 from 0.9 to 1.1 percent. Japan would thus still be well below the inflation target of two percent, which the central bank set in 2013 as a criterion for ending its ultra-loose monetary policy. But fears of a relapse into deflation are diminishing – with implications for companies, monetary policy and the currency and stock markets.
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This turnaround has been the government’s goal since 2013. The head of government at the time, Shinzo Abe, was pursuing two main goals with moderate inflation: firstly, currency devaluation can also reduce Japan’s high debt burden, which is currently almost 270 percent of gross domestic product.
On the other hand, he wanted to free companies from their deflationary spiral through nominally growing markets and give them the opportunity for wage increases. In response to the country’s aging population and the resulting shrinking markets, the management reacted with tough savings and refraining from real wage increases in order to remain profitable.
Japan wants to forget about deflation
However, despite a flood of money from the central bank, prices only rose briefly every now and then, only to fall again and again due to crises or the fall in commodity prices. The corona crisis, with its massive impact on supply chains and price increases, could now change this. The central bank is already observing that more and more companies are shedding the fear of price increases that they learned during the deflationary era.
Until now, because real wages have been stagnating since the mid-1990s, consumers have often responded to price increases by forgoing purchases. So far, many Japanese companies have been trying to cushion the up to nine percent higher purchase prices for raw materials, components and imports at the expense of their profits.
But in December, for the first time in years, a majority of company management stated in the Tankan report, the central bank’s quarterly economic report, that they wanted to pass on at least some of the higher purchase prices. That is rare, explains a central banker. The companies continued to proceed cautiously. “But the shift is significant.”
This mental change in companies gives Japan-optimists among investors hope for rising profits and thus higher share prices. Sean Darby, chief strategist at equity house Jefferies, expects the Tokyo Stock Exchange’s Topix index to rise 20 percent this year to 2,300 points.
Experts expect that the Japanese currency policy could lead to price increases on the markets.
(Photo: AP)
Another positive factor is Japan’s unusual monetary policy, which could further weaken the yen. Because while Korea’s central bank has been raising interest rates since the summer of 2021 and the USA could soon follow, a turnaround in interest rates in Japan is still a long way off due to low inflation.
Dollar vs. Yen: FX analysts bet on further decline
The mere prospect of widening interest rate differentials in Japan and the US has sent the yen down 10 percent against the US dollar over the past 12 months to between 113 and 114 yen per dollar. Many exchange rate analysts are now betting on another fall.
In combination with higher commodity prices, this has pushed Japan’s import spending to record highs. This fuels concerns about the shrinking purchasing power of companies, citizens and, above all, pensioners. The business daily “Nikkei” calculated for its readers on Thursday that the purchasing power of the yen, measured in terms of the real effective exchange rate, has fallen to its lowest level in almost 50 years.
But the central bank has so far believed that Japan’s economy is benefiting on balance. Because the weaker the currency, the higher the income and profits of the export industry abroad due to conversion effects. In addition, the government is calling on companies in the current wage round to finally raise salaries significantly in view of the rising prices.
If the price pressure increases more than expected, Japan’s central bank could also curb its ultra-loose monetary policy somewhat. But this risk is still only speculation. Up until now, hardly any economists have predicted that Japan could significantly exceed its inflation target of two percent in the next two years.
More: Japan’s special path in the corona crisis – Why Asia’s oldest industrial nation is immune to high inflation