Abenomics is floundering as Japanese inflation disappears
Japan's inflation rate, stripping out the effect of volatile items and tax changes, is now back to zero.
That's according to figures out overnight. The consumer price index (CPI) rose by 2.2% in the year to February — but that includes a sales tax hike the government brought in during April last year.
The zero inflation figure is a challenge for the government of Shinzo Abe, which set out on a programme to end Japan's deflationary decades, and an even bigger struggle for the Bank of Japan (BoJ), which is now committed to a 2% inflation target that it is nowhere near reaching.
Japan has had more than 20 years of low or negative inflation — which isn't helped by an ageing society, and is extrmely difficult to shift once it's set in — people come to expect no inflation, and get used to flat or very slightly falling prices.
Rabobank analysts are certainly sceptical of the monetary part of Abenomics (Abe's general economic recovery programme). In a note this morning they say that "the BoJ have proved themselves masters of their own form of black comedy with their insistence that a sustainable recovery is underway."
So what happens next? Japan already had a massive quantitative easing programme. The Bank of Japan has bought up bonds like it's going out of fashion, and owns more than 50% of many of the latest 10-year maturity bond issuances.
BNP Paribas doesn't expect more monetary easing from the Bank of Japan, which already has the biggest ongoing QE programme of any big advanced economy, compared to its size. But it does lay out four conditions under which it thinks Kuroda might step up and announce even more QE:
- "Shaken confidence that the Japanese authorities are committed to fighting deflation" — Since inflation's now back to zero, if the Bank of Japan saw expectations for inflation in the future fall significantly, it could do more QE.
- "Resumed surpluses in Japan’s trade account" — Japan once reliably ran trade surpluses, but in recent years it has been running deficits. BNP Paribas suggest a return to surpluses could cause the yen to appreciate, and the BoJ could act against that.
- "Receding expectations for Fed rate hikes" — this one is important. The yen-dollar exchange rate will have a big impact on the Bank of Japan's actions (it doesn't want the yen to be too strong). If the Federal Reserve looks like it'll delay interest rate hikes, the dollar could drop, and the BoJ might try to ease further.
- "A backlash against the strong dollar ahead of the US presidential election" — similar reasons here. BoJ governor Haruhiko Kuroda does not want a weak dollar.
Analysts at Daiwa Capital Markets didn't sugar the pill for Japan's policymakers, but did note one positive trend:
The headache for policymakers is likely to get worse over coming months – we expect core CPI to slip to negative territory next month and stay there till December. The BoJ might, however, take a crumb of comfort that the share of items in the core CPI basket with prices rising (excluding the tax hike) rose above 60% to its highest since 1998.
On other measures, Japan certainly doesn't look so bad. The country's Trade Union Confederation is projecting the strongest year for pay increases in this century so far. It's too weak as yet to add anything considerable to those overall inflation figures, but if that sort of growth becomes embedded each year it will be a big part of ending deflation:
Abenomics isn't down and out yet — but zero inflation is a big departure from the original goals of the programme.