There’s absolutely no question that the Bank of Japan’s efforts to nudge its stubbornly low levels of inflation to 2 percent are having some success. The latest reading, in November, showed that the core consumer price index (CPI) rose 0.3 percentage points to 1.2 percent year-over-year, the highest rate since October 2008.
Prices of durable goods even rose 0.4 percent – the first increase since 1985. Even wages are inching higher, and that’s saying something. Pay has been so stubbornly flat in Japan that Prime Minister Shinzo Abe has taken to repeatedly imploring firms to start paying their workers more. And they might even be listening. Along with durable goods, wages were up 0.4 percent year-over-year in November, the first increase in six months.
Credit Suisse economists Hiromichi Sharakawa and Takashi Shiono think the recent price increases may be significant enough that some people may have entered the labor force simply to maintain their current standard of living. In noting a recent jump in the number of people working in sectors such as retail and health care, which rely heavily on part-time workers, the economists speculated that “an increased number of housewives may have taken on part-time jobs.”
But one month of rising wages doesn’t make a trend. Wages have risen for a time and then dropped right back into negative territory on several occasions since 2008. As for the CPI, Credit Suisse’s economists believe retailers may have raised prices in anticipation of a flood of customers before the much-publicized planned increase in Japan’s value-added tax this April. If they’re right about that, the positive inflation trend may have a limited shelf life.
One trend that does have legs is the decline in the value of the yen. The Japanese currency is 6.6 percent weaker against the dollar and 7.2 percent weaker against the euro than at the beginning of October, which has made imports of food, energy and durable goods more expensive. That, in turn, contributed to the higher-than-expected inflation Japan registered in October and November. But the weakening yen can only do so much more for inflation on its own. “Year-on-year yen depreciation is set to provide less of a boost for the CPI going forward,” the economists wrote. “If the 8 percent consumption tax takes effect before wages have developed any significant upward momentum, a weakening of consumer demand will probably make it difficult for retailers to keep hiking their prices.”
Given all of the above, Abenomics is surely going to need a shot in the arm this year. On the fiscal front, the government has already obliged. In December, Japan approved a budget of ¥95.9 trillion, a 3.6 percent increase of previous spending plans. What’s more, Credit Suisse expects positive news on the monetary policy front as early as February. “The Bank of Japan would ideally like to see the yen weaken further before the tax increase, thereby boosting corporate profits sufficiently to encourage pay raises in upcoming annual labor contract negotiations,” the economists wrote, referring to the nationwide talks between unionized workers and managers that are set to begin in March. While the BoJ could go so far as to start buying real estate investment trusts or exchange-traded funds in the equity market, the economists think the bank’s most likely move will be to increase monthly purchases of government bonds from ¥7.5 trillion to ¥10.5 trillion.
Will it make any difference? Shirakaway and Shiono aren’t sure. Credit Suisse’s analyses find little evidence that growing the monetary base has caused an increase in either actual inflation or inflation expectations, and in a December report entitled “BoJ Sailing Deeper Into Uncharted Water?”, the economists ponder whether a new round of stimulus has any chance of doing so. The main problem, as they see it, is that few seem to believe the bank will be able to hit its 2 percent inflation target, regardless of whether there’s new monetary stimulus or not. Judging from how inflation-linked bonds are trading, the market is forecasting that inflation will plateau at about 1 percent after the April tax increase takes effect. Shirakawa and Shiono also note that households appear to be anticipating even weaker inflation than that.
Herein lies the problem: Both companies and individuals decide how to spend and invest based on their expectations of future prices. The entire purpose of setting a target is to influence market psychology. If most people think the target is a mirage, then that outlook can be self-fulfilling.
And then there are more technical issues to consider. The supply of government bonds the central bank can purchase from participating commercial banks is getting a little thin, particularly those with durations between five and 10 years. As a result, the central bank has been increasingly buying bonds almost immediately after they’re issued, rather than from participating banks. The central bank owns some 55 percent of the supply of a 10-year bond issued in November, for example. “Questions over the practicality of the Bank of Japan purchasing more Japanese government bonds than it is already purchasing suggest that policy execution risk is worth watching closely,” the economists write.
Shirakawa and Shiono expect the central bank to ramp up its bond purchases in early 2014, and they think it’s the right move. But there’s no telling what financial markets will make of such a move – raising the question of whether it will make any difference. Abenomics was launched with a clear vision and it had both quick and marked results. But the government’s next move is by no means obvious. There’s no question that Abenomics needs a booster shot. It’s just no longer clear what the best medicine is.
Above: Japanese Prime Minister Shinzo Abe applauds during a ceremony marking the last session of the year 2013 at the Tokyo Stock Exchange in Tokyo Monday, Dec. 30, 2013. Photo by AP Images/Shizuo Kambayashi