A first hand read on Japanese inflation data for June 2013 – Is this the beginning of an end of deflation?

On July 26, 2013, the Japanese government released its first read of the inflation outlook of Japan, following the conclusion of the Upper House elections last week. In the latest reading of the Consumer Price Index (CPI) for the month of June 2013, it showed that Japanese consumer prices, excluding fresh food rose 0.4 percent from a year earlier. At the time of the writing of this article, Bloomberg Online reported that the Japanese Yen currency surged amongst all its 16 major counterparts as Asian stocks declined. The Bloomberg Dollar Index fell for the second day amid bets that the Federal Reserve will reassure investors at the July 31, 2013 Federal Open Market Committee (FOMC) meeting that policy is likely to be accommodative.

The latest set of inflation data in Japan is slowly pointing towards the target inflation level set by Prime Minister Shinzo Abe’s government level of 2.0 percent. However, one of the questions comes into mind for many investors and ordinary folks in Japan is whether inflation increases are healthy for the economy overall. Generally, many economists will agree that as long as inflation levels are being controlled, there should not be any major impacts to the economy, particularly in Japan given that the country has suffered decades of deflationary woes. However, in a poll conducted by one of the polls conducted by the Bank of Japan (BOJ) earlier showed that inflation expectations among Japanese people are increasingly anticipating more price increases to come, something like slightly over 80.0 percent and was quoted in one of the articles published on Bloomberg Online. However, amid the price increases, household incomes are lagging behind the pace of price increases, which could weigh in heavily on consumer spending, and household consumption. Since May 2013, labour cash earnings fell 0.1 percent, which might crimp spending if prices of household items, gasoline, etc. start to outpace wage growth. This in turn, might result heavy cost burdens to many households, especially at a time when a planned consumption tax increase is on the horizon come 2014.

The extended years of deflationary conditions have dampened many Japanese consumers’ sentiments when it comes to spending. How is this so? One of the reasons is attributed to the low wage growth which resulted in many Japanese households not wanting to allocate much of their disposable income on consumer discretionary products. In addition, most Japanese households tend to have one sole breadwinner supporting the finances and upkeep of the household, where it is usually the majority of the men folks stepping up to cope with the household expenses, and daily essentials. In most cases, the purse strings to the household cash are controlled by the wife of the household, and one who gets to decide how to allocate the household finances. This arrangement works as long as there is a mutual understanding between husband and wife on how to manage the upkeep of the household. If there were to be a trend of uncontrollable price increases, it could have unintended consequences if wage growth remain stagnant. The issue of inflation is perhaps one of the most delicate concerns for many policy makers around the world, and not just Japan alone, as there are no boundaries as to how inflation will impact an economy like Japan. If taken too far, it might crimp growth, on the other hand, if inflation is generally well anticipated, then the economy will not experience much shocks.

In an Bloomberg report dated July 26, 2013, which was broadcasted during the Asian trading hours on ‘First up with Susan Li’, it highlighted the impact of inflation has on the elderly folks who depend on their Japanese Government Bonds (JGBs) for a fixed monthly returns in the form of interest income, plus welfare cheques whose values have declined as a result of the decades-old deflation. As a result of the slow income growth, coupled with the recent revival of price increases due to the weakening Japanese Yen currency, many food imports have become more expensive in local currency terms. This resulted in some elderly folks resorting to theft and shoplifting in supermarkets, and grocery stores in order to alleviate their need for the supplies of basic necessities in order to sustain daily living. The unintended consequences of price inflation has resulted in the rise in the number of elderly crimes, which does not bode well for a developed nation, known for its courteous, and law-abiding society in general.

In summary, the case of reviving the decades old price declines have mixed impacts on many Japanese households. On one hand, it helps domestic corporations in Japan as price increases might spur profit growth, but on the other hand, if taken too far, it creates quite a significant amount of issues for many Japanese households, and the elderly. With the overwhelming electoral mandate that Prime Minister Shinzo Abe has received from the voting public, it is important that the Cabinet, together with the Bank of Japan (BOJ) steers the Japanese economy in the right direction, which means not to get overly enthusiastic about ending the decades-old deflation, but instead should be adopting a much measured approach in tackling the structural issues as part of the so-called ‘Third Arrow’ of economic reforms. With that, it is also vital that the pace of price increases should be monitored by all policy makers, fiscal and monetary, and to make sure that inflationary expectations are kept in check in order to prevent any cases of runaway inflation which might impact the entire economic system in a negative manner. I believe this is something that the Japanese government will not want to see, if economic and social security are to be ensured.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc