Japanese CPI for June turns positive, but…
On the 26th of July it was announced that Japanese consumer prices (as measured by the CPI) rose by 0.2% YoY in June after being negative in the preceding several months.
In fact, this was the first positive CPI reading in 14 months, suggesting that perhaps Abenomics (see here for details) – especially the inflation stoking monetary stimulus program by the BoJ (see this piece for details) – is finally beginning to take hold.
However, as we at NipponMarketBlog have pointed out before (see this piece), the inflation currently being observed in Japan is more than likely of the ‘wrong’ kind, i.e. it is cost push inflation as opposed to demand pull inflation. In other words, the observed inflation is not a result of higher end demand from consumers (which is what the government is trying to stimulate, thus ending the deflationary spiral), but instead caused by higher costs in the manufacturing sector which in turn are caused by higher energy costs, which ultimately are a result of the weaker Yen.
Examining the CPI numbers in more detail, our suspicions turn out to be justified. The headline figure is a 0.2% increase, but stripping out food and energy, CPI was still falling at a rate of -0.2% per yer in June.
Unfortunately there isn’t a time series available for CPI ex energy alone, but it stands to reason that since food prices are still falling at a fairly steady 1% per year and energy prices have shot up dramatically, CPI ex energy also remains stuck in negative territory, although the trend certainly seems to be moving towards positive territory.
The chart below demonstrates the energy price dynamic quite clearly. Because of Japan’s dependence of imported energy (mainly Oil and Gas), broad energy prices are now rising at 7% per year and Electricity prices are rising at an uncomfortably high rate of 10% per year.
It is thus clear that as much as the headline numbers may appear to support the idea that Abenomics (or at least the monetary stimulus portion) is now working, the reality is that the weakening Yen is almost solely responsible for the rise in prices. In other words, this is far from the growth induced sustainable end to deflation that the government is attempting to engineer, and most likely also less than exciting for the equity markets which will see through this.
The real issue, as we have pointed out here at NipponMarketBlog several times in the past, is that unless wage inflation takes hold, then the only effect on the consumer of inflation turning positive will be one of falling real wages. This in turn will induce consumers to hold back on consumption, and this is exactly the opposite of what the government is trying to achieve. The precarious position of government finances (which we have examined in detail here), makes it absolutely imperative that the Japanese economy is kick-started into renewed growth. A failure to make this happen will eventually lead to some form of government default, whether this be outright default or simply monetization of government debt through accelerated BoJ QE.
The BoJ has officially adopted an inflation target of 2% which we here at NipponMarketBlog believe will be difficult to attain, but in the same breath we should point out that actually attaining this stated goal is in itself not particularly important. 2% is just a number. The real issue is whether the government and the BoJ manage to eventually force the economy onto a growth path. With the prospect of falling real wages, and a possible re-introduction of the controversial consumption tax, Abenomics is still very far from having proven itself a success.
Headline inflation may well continue to be positive for several more months, but unless this eventually translates into higher wages and thus higher consumption, the self-sustained economic recovery with an end to the deflationary spiral at its core, will continue to elude Japan.