Inflation makes mess in Japan, Batters Yen. BOJ’s Kuroda Clings On His Last Fingernail To “Transitory”

But it comes out in April.

By Wolf Richter for WOLF STREET.

Bank of Japan Governor Haruhiko Kuroda, the architect of Japan’s insane money-pressing frenzy under the economic religion of Abenomics, which began in 2012, will leave the BOJ when his term expires in April 2023. his interest rate policy because it’s been his baby for 10 years no matter what happens with inflation and it’s up to the next person to deal with this mess. And it’s starting to get messy.

Japanese “core” consumer price index for all items, less fresh food — which the BOJ uses for its inflation target — is up 0.6% in October from September, according to data from Japan’s statistics office today. This amounts to 7.4% on an annual basis. The 0.6% increase was the worst month-on-month increase since the consumption tax increase in April 2014; and thereafter, since May 2008; and further, since the consumption tax increase in April 1997.

On a yearly basis, the “core” CPI rose to 3.6%, the worst since 1982, even surpassing all consumption tax increases. The purple line indicates the BOJ’s inflation target. While inflation shot right through that target in April, the BOJ kept its short-term policy rate staunchly at -0.1% and its 10-year rate peg at 0.25%, which is just crazy.

Seeing the spike in core CPI today, Kuroda said it was rising “quite a bit,” and sticking to the “transient” theory with his last fingernail, he said it will fall below 2 in the next fiscal year. % would fall, starting in April, as the impact of fuel and commodity prices fades. But as we’ll see in a moment, inflation has already transcended fuel and commodities and spread deep into the economy.

The CPI for all items jumped by 0.6% month-on-month, and by 3.7% year-on-year, matching the consumption tax peak in May 2014, and then the worst increase since 1990:

The end of the era of real price stability.

Inflation is especially insidious in Japan, where there has been something like real price stability for 23 years, where periods of inflation have been followed by mild prolonged deflation, until prices have generally remained about the same for about 23 years. People, society and the economy are not prepared to deal with inflation at all.

During this period, the consumer price index for all items – as an index value to reflect price levels, not year-over-year change – had been relatively flat. After the consumption tax increase in 1997, the index came to around 99. Over the next 13 years, the index then fell by a total of 5%, then rose again to 100 in 2018 and remained there until about the end of 2021, when inflation increased .

Some of the major inflation categories.

  • Food: +6.2% year-on-year: fresh food +8.1%; fish and seafood (critical in Japanese cuisine) +13.9%; fresh vegetables +6.7%.
  • Energy: gasoline, electricity, piped gas to home, propane, kerosene: +15.2%.
  • Household itemssuch as furniture, appliances, utensils, bedding: +6.9%.
  • Reimbursed and maintenance: +6.9%
  • Communication: +5.6%
  • Clothing and footwear: +2.5%
  • Rent: 0% (that’s nice)

Governments control inflation with categories they control.

  • Healthcare inflation: In this system of universal health care, the government largely determines what consumers must pay:
    • Medical care: +0.2%
    • Medicines: +1.3%
    • Medical Supplies and Devices: +0.1%
    • Medical services: -0.3%
  • Public transport: +0.3%
  • Education: +0.7%
  • Water and sewer costs: -3.4%.

BOJ buys yen to prop it up after it was battered by BOJ’s let-her-rip inflation policy.

In mid-September, when the yen was in freefall against the USD, the BOJ began periodic operations of selling dollars and buying yen to support the currency in that way, rather than raising its policy rates to gain traction. to get on inflation, which would solve the problem of the yen.

A declining yen makes imports of all kinds more expensive, not just raw materials, food products and energy, but also consumer products and components for manufacturers.

While the declining yen helped convert Japanese companies’ foreign exchange earnings from sales abroad into higher yen numbers, it did not actually impact earnings from products Japanese companies make and sell abroad, such as automakers that all have factories in the US, Mexico, China and Europe. And a lot of what they sell in these markets is made in these markets, not in Japan. A weaker yen doesn’t really help these manufacturers, but it allows them to turn their sales in dollars, euros, renminbi and pesos into more collapsed yen, which looks better in yen.

But they are groaning under the rising costs of products they sell in Japan.

In January 2021, it cost about ¥104 to buy $1. Last month, it cost more than 150 yen to buy $1. Today it was 140 yen to the USD. The large declines of the past two months are likely due to BOJ interventions:

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