As unintuitive as it may sound, Japanese economists are welcoming
runaway inflation as it gives them the chance to foster heightened
expectations of a long term jump in prices.
For the rest of the world inflation is bad news but for Japan, a quick
rise in food and oil prices is being hailed as an indicator for a
turnaround in the economy.
The nation’s headline inflation rate rose to the record level of 1.3
percent in the last fiscal year to March 2008, brought on by
significantly increased prices for petrol, pasta and many other fuels
and foods. For a country that has been in the grip of pronounced
deflation over the past decade, that’s a pretty high level. The majority
of central banks in developed nations would balk at anything outside
the normal 2-3 percent range that they are comfortable with.
Not that increased prices are fundamentally good for the Japanese
economy, they are not. You are going to get a lot less food for your yen
now and both public and corporate consumers will have to tighten the
belt. Apart from energy and food, inflation has remained at a relative
status quo, rising only 0.1 percent in the last year.
This marked increase in headline inflation is, however, an opportunity
because of its effect on real interest rates, pushing them steadily
downward. If the nominal rate stays at half a percentage point then real
rates will be negative, this in theory should spur economic activity in
the marketplace and mould sentiment to expect prices to continue to
increase.
“We have already seen certain indicators of expected inflation gaining
steeply,” says Michael Lane, Global Co-Head of the Investment Management
Division at Shizuoka Capital Wealth Management
in a phone interview. “Jumps in prices for ice cream, theatre tickets
and gasoline are felt straight away by the nation’s consumers. On the
other end of the scale there is minimal effect from government bonds.”
Indeed, most Japanese experts will be hoping the inflation is sustained,
but that will depend on increased wages and further trends in consumer
spending. Wages currently look promising and are entering a positive
cycle and will continue to influence matters as long as the Bank of
Japan doesn’t meddle with interest rates.
It’s widely expected that the BOJ will not adjust rates, but economists
want a guarantee that the current rates will go on in the future, at
least until good inflationary expectations are solidified.
