Sat, May 22, 2021 page10

• Falling prices could lift Japan economy via a weaker yen

  • Bloomberg
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  Japan is bucking the global trend of rising inflation with continued falls in prices, a disconnect that could split its policy stance away from the trajectory of other major economies and further weaken the yen.

  While one measure of inflation in the US hit 4.2 percent last month, its highest in more than 12 years, a key indicator of consumer prices in Japan dropped 0.1 percent from a year earlier, as falling cellphone charges countered rising energy costs.

  With Japanese firms so cautious about passing on higher costs to their customers, the gulf in price moves is set to continue for now, an outcome that could wind up helping an economy teetering on the edge of double-dip recession by making its currency weaker.

  

  Sachie Ohashi, who runs a shop with her husband called Musashiya, which makes and sells traditional Japanese socks, poses for a portrait at Ginza District in Tokyo on Wednesday.

  Photo: Reuters

  “When it comes to inflation there’s none of it to worry about in Japan,” said Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research & Consulting. “Raising prices now could be a fatal mistake for Japanese companies even with soaring commodity prices. It’s a very different situation from the US.”

  Makoto Okazaki, the manager of Ishizaka, a small noodle manufacturer in Tokyo, is among those reluctant to hike prices. Wheat costs are rising, but he will do everything he can to avoid putting up his own prices, he said.

  The stance of Okazaki and other business operators reflects an entrenched mindset that has built up since the late 1990s, as people got used to repeated spells of falling prices and meager wage gains that fed a vicious cycle of companies absorbing rising costs at the expense of profits and pay increases.

  Bank of Japan (BOJ) Governor Haruhiko Kuroda said he would transform this deflationary mindset when he took the helm of the bank in 2013. Eight years of massive stimulus later and the logic of static prices and minimal wage gains still largely holds true.

  Kuroda himself admitted as much on April 27, when the BOJ released its latest inflation projections showing for the first time that the 2 percent price goal still would not be in sight when his term ends in 2023.

  The administration of Japanese Prime Minister Yoshihide Suga is not helping either. Rather than pursuing the inflation goal with the initial zeal of his predecessor, the pragmatist in Suga is looking to put more money in voters’ pockets via cheaper cellphone bills ahead of an election later this year.

  The 26.5 percent slide in mobile phone charges last month dragged down overall inflation by 0.5 percentage points.

  With price growth so far from its 2 percent target, the BOJ will need to keep its stimulus rolling for longer in contrast to the US, where some Federal Reserve officials are talking of their openness in the future to discuss tapering support for the economy.

  Even if the Fed is still a ways off dialing back its measures, as indicated by its Fed Chairman Jerome Powell, the impression of eventual policy divergence could be enough to soften the yen further, an outcome that would help Japan’s biggest exporters.

  The perceived divergence in policy trajectory has already helped the yen to weaken the most among major currencies this year, offering a critical boost to Japan’s export-reliant recovery.

  A weaker yen does not directly benefit everyone in the economy, especially importers, but it is one of the most important factors that has helped improve corporate performance and spur an economic expansion in recent years.

  “You could say that the BOJ is actually helping the economy by failing to achieve its target,” Kobayashi said. “Because that helps keep the yen weak.”
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