Japan’s Slowing Consumer Inflation Piles Pressure on BOJ
TOKYO (Reuters) – Japan’s annual core consumer
inflation slowed in November, reinforcing market expectations the central bank
will hold off on whittling down stimulus for a prolonged period as prices
remain distant from its target.
A woman holds a shopping bag as she waits at a pedestrian crossing
in the Ginza district in Tokyo, Japan, March 24, 2016. REUTERS/Thomas Peter
The data drew attention to Bank of Japan
Governor Haruhiko Kuroda’s warning on Thursday that rising economic risks will
keep the central bank open to the idea of boosting – not trimming – stimulus.
The nationwide core consumer price index
(CPI), which excludes the effect of volatile fresh food costs, rose 0.9 percent
year-on-year in November, government data showed on Friday. That was below a
1.0 percent gain in October and off market forecasts for a 1.0 percent
increase.
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“Falling oil prices will likely weigh heavily
on inflation,” particularly around spring next year when the drop in fuel costs
push down electricity and gas bills, said Takeshi Minami, chief economist at
Norinchukin Research Institute.
“As achievement of the price target becomes
elusive, the BOJ could be forced to respond if downside risks to the economy
heighten,” he said.
In a sign soft household spending is weighing
on inflation, the rise in so-called core-core CPI, which strips away the effect
of both fresh food and energy costs, slowed to 0.3 percent in November from 0.4
percent in the previous month.
The weakness in the core-core price gauge will
be particularly worrying for the BOJ, which focuses on the index for clues on
whether strengthening economic growth is changing companies’ price-setting
behavior.
Marcel Thieliant, senior Japan economist at
Capital Economics, said the slowdown in core-core inflation was a “big
disappointment” and could persist as producer prices of consumer goods stopped
rising altogether in November.
“The risks to our forecast that inflation
climbs to 0.7 percent by the time of next year’s sales tax hike are
increasingly tilted to the downside.”
Stubbornly soft inflation has dashed the BOJ’s
hopes a solid economic recovery would translate into higher prices, forcing it
to maintain its huge stimulus despite unwelcome side-effects such as the
erosion of financial institutions’ profits from years of near-zero interest
rates.
US trade delegation leaves hotel ahead of second day of talks in
Beijing
Adding to the headache for policymakers,
Japan’s economic growth contracted in July-September and is expected to rebound
only modestly on darkening prospects for exports.
The central bank maintained its ultra-easy
policy at a rate review on Thursday, lagging further behind the U.S. Federal
Reserve in unwinding crisis-mode stimulus.
The International Monetary Fund has called on
the BOJ to maintain its massive stimulus, arguing that the side-effects of
prolonged easing are not enough to outweigh the benefits.
“The only game in town is achieving the
target. Tightening now is not going to help you get there. They’re very much
committed to reaching the target, and we think that’s the right thing to do,”
said Paul Cashin, the IMF’s mission chief for Japan.
Reporting by Leika
Kihara; Editing by Shri Navaratnam
Commentary
Economic growth stands for the
increased capacity of an economy to produce goods and services over a period of
time[1].
This can be expressed as GDP or GNP. Economic growth has a ripple effect,
thereby having far reaching impact on growth of businesses, investment,
consumption and employment opportunities in the country. Hence to keep the
country in the positive growth trajectory it is important that the economy
provides an environment suited for increased production of goods and services.
Inflation refers to a continuous
fall of the value of money or a sustained increase in the general price level[2].
Japan registered a decrease in inflation i.e. , a deflation in the month of
November. In October, though the core Consumer Price Index showed an increase
of 1% , in November it was reduced to 0.9%. The CPI measures the rate of change
of prices of goods and services, either monthly or quarterly by collecting
information directly from the retail outlets or shops and calculating the
average prices[3].
The fall in household spending is one of the main factors behind the deflation
in November. A rise in prices of the goods and services – the probability of
which is low in the current scenario- is required to revive the economy. The
deflation is predicted to rise since the drop in oil price will further reduce
the gas bills and electricity bills in the country. The circular flow of income
shows us that households should spend money in the economy and provide labour
and capital for economic growth which is then reciprocated by producers who
deliver the goods and services. Due to this interdependence, the low cost of
products would yield comparatively lower profits to producers making retention
of large number of employees unsustainable. The reduced paying capacity of the
consumers reduces the investment in the economy, slowing down growth and GDP. GDP
is the monetary value of sum total of goods and services produced in a country and
purchased by the consumer within a fixed period of time[4].
GDP can be measured through the
expenditure approach as Y= C+I+G+X-M, where C represents the expenditure on
final household consumption in the country, thus illustrating how an increase
in C would consequently increase the GDP.
Price
level
Long run Aggregate
Supply
P1
P2
AD 1
AD
2
0 Y2 Y1 Real GDP (Y)
In the graph when the prices
decrease, there is decrease in AD and decrease in real GDP, causing deflation.
In Japan the BOJ is said to be waiting for private businesses to increase their
prices so that it can roll back its stimulus as increase in price of goods and
services will generate more profits for them, thereby enabling them to employ
more people.
Though the government policy is
to regulate inflation it is generally the Central Bank of the country which is
entrusted with this responsibility[5].
The BOJ primarily relies on the Core Consumer Price Index to observe whether
the companies have changed their prices in response to an inflation or
deflation. To counter the ongoing deflation so that the GDP continues to rise,
the Bank of Japan is already pumping money into the economy by selling its
bonds and other measures thereby neutralizing years of profits to keep the
economy in the growth trajectory. In the absence of rise in prices and
inflation and the predicted deflation for the near future, the BOJ is forced to
continue to keep investing funds in the economy to aid in its growth.
Keynesian economics asserts that
the government can contribute to restoring the aggregate demand of the market
through fiscal and monetary policies intended to revive the economy. In this
the aggregate demand is measured as the overall spending of the government,
businesses and households[6]. According to Keynes when the aggregate demand
(AD) increases through increasing spending or consumption in the economy, it
increases the overall output of the economy leading to economic growth.
PRICE
LEVEL LRAS
P2
P1 AD 2
AD1
Y1 Y2
REAL GDP (Y)
The relationship between AD and
inflation as described in the Keynesian theory is the same as that mentioned in
the article. The main concern as deflation persists is that the central bank
has to infuse money into the economy to protect it from threat of further
deflation. The article also shows how this reduced AD will have an inevitable
adverse impact on the exports of the country further hampering economic growth
at the time of deflation. The focus of the government should be on addressing
the short term concerns of the economy such as unemployment and reduced
purchasing power of the people rather than solely thinking for long term
solutions as the solutions to short term issues ensures sustained economic
growth[7].
If the current realities were to continue then Japan may face difficulty in
maintaining its economic growth as all signs show that a drop in prices is
inevitable in light of reduced oil prices and exports.
If policy changes are not made,
then deflation is more likely to persist. Since it is understood that deflation
will get worse in the near future, it is prudent to take preemptive steps and
policy changes.
[1]
Investopedia https://www.investopedia.com/terms/e/economicgrowth.asp
[2]
Labonte, Marc(2011) Inflation: Causes, costs and current status Congressional Research Service 7-7500 https://pdfs.semanticscholar.org/48ac/7bf4dd4a6c9bce7c05722506274307bba096.pdf
[3]
Consumer Price Index manual (2004) ILO,
IMF, OECD, Eurostat, UN and World Bank Page: 17 https://www.ilo.org/wcmsp5/groups/public/—dgreports/—stat/documents/presentation/wcms_331153.pdf
[4]
Callen, Tim (2008) What is Gross Domestic Product Finance and Development Page: 48 https://www.rrojasdatabank.info/imfongdp.pdf
[5]
Consumer Price Index manual (2004) ILO,
IMF, OECD, Eurostat, UN and World Bank Page: 66 https://www.ilo.org/wcmsp5/groups/public/—dgreports/—stat/documents/presentation/wcms_331153.pdf
[6]
Jahan, Sarwat; Mahmud, Ahmad Saber and Papageorgiou, Chris (2014) What is
Keynesian Economics? Finance and
Development –International Monetary Fund
Page: 53 https://www.imf.org/external/pubs/ft/fandd/2014/09/pdf/basics.pdf
[7]
Jahan, Sarwat; Mahmud, Ahmad Saber and Papageorgiou, Chris (2014) What is
Keynesian Economics? Finance and
Development –International Monetary Fund
Page: 54 https://www.imf.org/external/pubs/ft/fandd/2014/09/pdf/basics.pdf
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