A political decision to solve Japan’s terrible fiscal chaos by stoking inflation and forgetting the 2% target.
By Wolf Richter for WOLF STREET.
Outgoing Bank of Japan chief Haruhiko Kuroda and new chief Kazuo Ueda sang the same anthem as Friday’s worst inflation numbers since 1981 came to light: This inflation will go away on its own, and we’ll take the ruthless negative interest rate – and maintain money printing policy.
Kuroda has committed his entire tenure at the BOJ to this policy and cannot back out now, no matter what inflation does, and inflation does; and Ueda cannot contradict Kuroda. He will become boss in April and until then he will be singing from the same anthem. Eventually, there will be a monetary policy review, which will find that this policy has worked great, but maybe it’s time to adjust it a bit. All of this will last until the second half of this year, and until then the BOJ will be stoking this inflation with a vengeance.
Japan’s “core” consumer price index for all items less fresh food, which the BOJ uses for its 2% inflation target, rose 4.2% year on year in January, the worst rate since 1981, according to data today from the Japan Bureau of Statistics. The index is now more than double the BOJ’s target, having topped all previous four peaks, three of which were driven by consumption tax hikes. Inflation broke the BOJ’s inflation target (purple line) in April 2022.
There was no consumption tax hike this time, but widespread and worsening price hikes across a wide range of goods and services as inflation seeps deeper into the economy.
The CPI for all items up 4.3% yoy, also the worst inflation since 1981.
Month-on-month, CPI rose 0.5%, the biggest jump since October. In this whole phase of inflation, there have only been three month-to-month jumps of 0.5% or more (January 2023, October 2022 and July 2022). There is nothing slowing down about this inflation.
This is despite the government’s energy stimulus program keeping inflation low; and despite large parts of the economy where nearly all aspects of consumer-based pricing are either set or controlled by government, including the major universal health care system, public transportation system, and education.
Main categories of inflation.
- Grocery: +7.3%, worst since 1980. Includes: fresh seafood +17.2%; meat +7.6%; Dairy products and eggs +9.5%; Vegetables & Seaweed (+3.4%); fruits (+2.7%); Beverages (+6.3%).
- Eating out: +5.9%.
- Housing minus imputed rent: +4.7%
- Repairs and maintenance: +8.2%
- Household electricity, gas, water, waste water: +14.9%
- Household durable goods: +11.1%
- Communication: +7.1%
- Clothing and shoes: +3.1%
- Clothing-related services: 5.0%.
Governments keep inflation low where they control prices.
- Healthcare inflation: In Japan’s universal healthcare system, it is largely the government that decides what consumers have to pay:
- Medical care: +0.5%
- Medicines: +1.6%
- Medical items and devices: +1.2%
- Medical services: -0.3%
- Public transport: +0.6%
- Education: +0.7%
Goodbye price stability.
Between about 1993 and 2021, the consumer price index stayed in the same narrow range for all items, with some fluctuations in between, with the brief one-off jumps caused by the consumption tax hikes. This was an era of mild inflation followed by mild deflation, the era of more or less genuine price stability, a rare occurrence in the modern world. And it’s over.
A political decision to fuel inflation to solve the fiscal mess.
Kuroda said at the G20 event in India that he expects inflation to be below 2% for fiscal 2023, which begins April 1, and for fiscal 2024. He’ll be out early in fiscal 2023, so it’s no longer his job to bring inflation down to 2% in fiscal 2023 and 2024. He’s reportedly clinging to the fiction that this inflation is “temporary,” but say what he likes. It will be his successor’s job to take care of it.
His successor will be Kazuo Ueda. But he’s still not on the job and pending confirmation, so he’s not going to rock the boat until he’s even gotten his feet on the boat. He said today that the BOJ’s negative interest rate policy and money printing are appropriate. And like Kuroda, he’s still blaming that inflation on supply issues, a strategy even the Fed abandoned a year ago after being pissed off by it.
One thing is for sure, even under new leadership, the BOJ will take months to do anything, even just a monetary policy review, and inflation will continue to be stoked to rage in all its glory.
While inflation is ravaging Japan’s budgets, it is also a way to pay off Japan’s gargantuan and unsustainable tax debt.
It is now clear that a policy decision has been made to deal with this fiscal mess by letting inflation rage and actually fueling that raging inflation – and forgetting the 2% target.
In all actuality, what else could they do? That’s how this kind of fiscal waste and money printing always ends up: in a raging inflation that insidiously solves this fiscal problem at the expense of households – but it solves this problem.
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