Inflation Comes to Japan, amid Plunging Yen, Inflation Subsidies. Bank of Japan Blows it Off as “Transitory,” Throws Yen under Bus

The Japanese people are not amused.

By Wolf Richter for WOLF STREET:

OK, so here we go. The overall consumer price index for all items in Japan jumped by 0.4% in April from March, the third month in a row of 0.4% increases (4.8% annualized), and by 2.5% from a year ago, up from an increase of 1.2 % in the prior month, Japan’s Statistics Bureau reported today.

The Japanese people are not amused.

Food prices jumped by 4.0% year-over-year, including fresh food (+12.2%), driven by the all-important categories of fresh seafood (+12.1%) and fresh vegetables (+12.2%).

“Fuel, light, and water charges” spiked by 15.7% year-over-year, including electricity (+21%), gas for the home (+17.5%), and “Other fuel and light” (+26.1%).

Prices for household durable goods, such as furnishings and appliances, are jumped by 5%.

The now ended price wars amid wireless carriers still held down the overall inflation rate: The index for “communications” dropped by 10.9% year-over-year, but those price wars had peaked last year, with the steepest month-to-month drop in April 2021 (-24% from March). The year-over-year decline peaked by over 34% in December. Recent month-to-month changes indicate that rates have flattened. And going forward, this category’s downward pressure on the overall price index will dissipate, and the other price increases can carry the day.

Wholesale inflation blows out. On Monday, Japan’s wholesale price index for April was released, and it spiked by 10%, the worst jump in at least 40 years, as inflationary pressures are building up in the pipeline.

Inflation subsidies, of course. The government has passed a series of inflation relief packages, including one-time cash handouts of ¥50,000 ($391) per child to low-income families to help them pay for the higher prices.

The inflation subsidies also include cash payments made to gasoline wholesalers and distributors so that they would lower their gasoline prices, which would lower retail gasoline prices and therefore the inflation index for gasoline prices. The amount of the subsidies is adjusted weekly.

Subsidizing wholesalers is an ingenious move because it pushes down the retail price of gasoline, and thereby the inflation index, which then makes the overall consumer price index seem less bad. These subsidies to wholesalers have been in effect since early this year, and the inflation index would look worse without them.

Healthcare “inflation” largely decided by the government: pushing down on it. Health insurance and healthcare in the US are huge budget items for Americans, and inflation has been rampant. That’s not the case in Japan, which has a government health insurance system for universal coverage, funded by taxes and individual contributions. Enrollment is required, either employment-based or residence-based. The amounts that the Japanese pay directly for healthcare (co-pays, etc.) are small, compared to what Americans pay. And a lot of the consumer-facing costs are determined by the government.

So, yes, the price index for “Medical services” fell 1.8% year-over-year in April, the steepest decline in years. The index for “medicines & health fortification” rose 1.2% year-over-year. The index for “Medical supplies & appliances” fell 0.3% year-over-year.

The core inflation index – “All items less fresh food” in Japan – jumped by 0.4% in April from March, after having jumped by 0.5% in March, and by 0.4% in February (average of 5.2% annualized). Year-over-year, it jumped by 2.1%.

The Bank of Japan: It’s just transitory, throws yen under the bus.

The “All items less fresh food” index is the measure that the Bank of Japan uses for its inflation target of 2.0% — or as it calls this, it’s “price stability target.” The BoJ has been justifying for years its money printing orgy based on this measure having been mostly below 2%. And when it went above 2%, the BoJ blew it off because of what it calls its “inflation-overshooting commitment.” And it says, “With this commitment, the Bank aims to enhance the credibility of achieving the price stability target of 2 percent of the public.”

So, true to form, the BoJ has been blowing off the inflationary pressures, and has been saying, in the best Powell imitation, that those pressures are just “transitory.”

“There is no need to tighten monetary policy in response to a transient trend, as opposed to a sustained one,” BoJ’s head Haruhiko Kuroda told a nervous Parliament in April.

The yen has plunged all year (except for a bounce the past few days), which is where part of those inflationary pressures come from, as the plunging exchange rate of the yen against the dollar makes imported commodities and raw materials, including food and energy commodities, a lot more expensive.

The yen has plunged against the dollar because the BoJ refuses to budge off its negative policy rate and Yield Curve Control, even as the Fed is now grappling with inflation, and US yields have shot higher. Given the recklessness of the BoJ, yen has paid the price, and the BoJ as thereby contributed to importing inflation.

But to its credit and despite all its endless money-printer rhetoric, the BoJ effectively ended its aggressive government-bond buying program at the end of 2020, and its holdings of Japanese government securities peaked in February 2021.

And that’s still the peak, despite a bout of bond buying recently, as part of its Yield Curve Control, to try to tamp down on the 10-year yield that threatened to shoot past the BoJ’s upper limit of 0.25%. So the holdings of Japanese government securities rose in April but remained substantially below the February peak.

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