It is time again to look across to Nihon or the land of the rising sun. On the one hand it is getting ready to stage the Olympics and on the other there are a rising number of Covid-19 cases. Switching to the economics Japan must be having a wry smile at the various “tapering” debates as it has been there so many times. I stopped counting on the 19th version of QE and that was a while ago now. They must also be a little bemused if they look south to New Zealand which looks to be planning some interest-rate rises.
Meanwhile the Bank of Japan continues on the same path. On Friday we got its latest announcement and as well as keeping the -0.1% interest-rate we were told this.
The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent.
The reason I pint this out is that it has turned into an interest-rate rise of sorts, or to be more specific that 0% target stops Japanese Government Bonds from rallying past that point. This morning it was at 0.01%. This means that it has missed out on the yield falls we have seen elsewhere with the US ten-year falling by around half a point. If we switch to Germany it looked back in late May that its benchmark yield might be on its way to positive territory again is now -0.36% as I type this. This is awkward because you are doing QE because you believe lower yields give the economy a boost but then you stop the yields from falling further. Meanwhile you continue to buy JGBs on a grand scale.
In terms of the money supply the Bank of Japan has been pumping things up.
The year-on-year rate of change in the monetary
base has been positive at around 20 percent, and
its amount outstanding as of end-June was 660
trillion yen, of which the ratio to nominal GDP was
121 percent.21 The year-on-year rate of increase
in the money stock (M2) has been at around 6
percent, mainly reflecting an increase in fiscal
spending and a past rise in bank lending.
But as you can see the impulse fades considerably even before it hits measures which are influenced by the real economy.
Inflation
Many countries are facing an inflation scare with the debate being how long it will last? Not Japan.
The year-on-year rate of change in the CPI (all
items less fresh food) has been at around 0
percent recently due to a rise in energy prices,
You may note that it has taken a rise in energy prices to get things to zero and zero is essentially what we have observed throughout the “lost decade” period. As someone who has a mobile phone contract which rises every year this seems typically Japanese.
a reduction in mobile phone charges.
If we drill deeper into the situation we see something else which is Japanese and here is the Bank of Japan explanation.
In the cases of the United States
and Europe, the output prices indices have
exhibited remarkable increases in tandem with
the escalation of the delivery delay indices.
As we have observed costs have risen and we tend to respond by raising prices but behaviour in Japan is different.
On the other hand, in the case of Japan, although
both the delivery delay index and the output
prices index have increased, the recent degree of
increase for both indices has been limited
compared with that in the United States and
Europe
Why is that?
The relatively small degree of rise in Japan’s
output prices index may be partly attributable to
Japanese firms’ strong tendency, at least in the
short run, to ration their products without raising
their selling prices when faced with excess
demand.
So Japan places the quantity rather than the quality ( I take price as a quality measure) game. Thus they avoid at least some of the second and third order effects of higher prices. Even when things came under what they considered to be real pressure they only saw the sort of level the UK is at now.
In this regard, in the final phase of the rise in
commodity prices in the 2000s, the year-on-year
rate of change in the CPI excluding fresh food
temporarily increased to around 2.5 percent,
Could you imagine the Bank of England ever writing this?
That said, the price change distribution at
that time shows that the rates of increase for a
majority of CPI items stayed at around 0 percent,
So even when you get the below it gets heavily watered down.
and only those for a limited number of items, for
which the raw material ratio is large, saw high
price rises of around 4-6 percent
Or as they put it.
Considering these past experiences, it seems
highly likely that the CPI inflation that merely
reflects upstream cost increases will spread to
other items to only a limited extent, and thus will
be only transitory.
So if anywhere is going to see transitory inflation then as Talking Heads put it.
I Guess that this must be the place
Wage Inflation
This used to be mostly ignored as an issue in economics because wages were assumed to rise faster than prices. That changes years and in this case decades ago as it is a feature of what we call the lost decade. Although the news has yet to reach some of the Ivory Towers.
The year-on-year rate of change in scheduled
cash earnings has been positive to a relatively
large extent on the back of (1) a rebound from the
decline seen last year, (2) rising wages of full-time
employees in the medical, healthcare, and
welfare services industry, which faces a severe
labor shortage, and (3) a fall in the share of part-time employees, mainly due to the adoption
of equal pay for equal work.
We actually have some wages growth at 2% and at first it looks good because with no inflation that is a real wages rise. Except when we look back to May last year we see that real wages fell by 2.3% so in fact we are worse off. We will find out more soon as June and July are months which are significant in bonus terms but as we stand we see that wages have continued to stagnate overall.
I do like the “sooner or later” bit below.
Special cash earnings
(bonuses), which lag behind corporate profits by
about half a year, are likely to stop declining
sooner or later, reflecting improvement in
corporate profits, and continue increasing steadily
thereafter.
Comment
The Japanese experience is really rather different but in a curious development often ends up in the same place as us. They have a system where many of the numbers are 0 as we look at interest-rates and yields, inflation and wages growth. If we look at the overall pattern we see that national GDP has followed not that different a path, although the individual number is better. But they have taken ZIRP and end up with it in other areas.
But the lesson here is that at least part of the inflation issue is behavioural. Care is needed as other parts of the Bank of Japan report look at the impact of the higher price for crude oil. But that is in play and Japan has seem 0% CPI and lower producer price inflation than us. In spite of this.
In foreign exchange markets, the yen has
depreciated somewhat against the U.S. dollar
amid a weaker yen against a wide range of
currencies.
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