Rising commodity prices and a post-Covid world have managed to raise the inflation rate in Japan this year, something the central bank had seemingly failed to do throughout years of monetary stimulus. Prices have risen in Japan since the beginning of the year and, as an example, a famous Japanese corn snack called Umaibo has hit the headlines, with its price rising by 20%, the first rise since the product was launched in 1979. In August, headline inflation grew by 3% year-on-year; the first-time inflation in Japan has beaten its 2% target since it was introduced in 2013.
Japan has struggled with low inflation for decades, grappling with deflation at times, and subsequently the Bank of Japan (BoJ) has favoured loose monetary policy to make financing conditions as easy as possible for households and companies. In 2016, the central bank adopted a policy to cap 10-year government bonds close to 0.25% – a policy which remains today. While other countries are raising their interest rates to tame elevated inflation, the BoJ has kept them negative, allowing prices to rise through their target.
Why rates are still so low?
Firstly, the Japanese economy took more time to recover from the pandemic. Indeed, certain elements of the economy continue to run on a restricted basis and consumers are being cautious. America’s GDP regained its pre-pandemic size by the 2nd quarter of 2021, while Japan did so a whole year later.
Additionally, companies have not yet transferred the rising cost of goods to consumers, nor have wages markedly increased. On average, big firms in Japan have increased salaries by 2.3%; well below the government’s target of 3%. If nothing changes, the BoJ expects inflation to fall back under 2% again. However, many believe further price rises are coming, with companies under pressure to pass on rising costs.
The BOJ’s governor, Kuroda Haruhiko, reiterated his willingness to keep rates as low as possible, though this is becoming more and more difficult. While the rest of the world is raising rates, investors will look for higher returns elsewhere, which leads to a weaker currency. Indeed, after his announcement, the value of the yen fell to its lowest in 20 years. The falling currency makes imports more expensive, and commentators expect the country’s import costs to rise by 50% in August, year-on-year.
We see this as an opportunity. It is a matter of debate whether or not the BoJ will amend its accommodative monetary policy should inflation continue to rise. If they stay the course and maintain low rates and yield curve control, this should continue to help businesses. In fact, Japanese corporate profits and margins have continued to improve over the long term. Although a weaker yen can be inflationary, it is also beneficial for Japanese businesses that rely upon exports, making it cheaper for importing parties and tourists. Should the BoJ decide to amend its policy stance, the yen should strengthen, providing a boost to international investors and reducing the impact of imports on rising inflation.
Source: Refinitiv – Market returns 30/09/2022 to 06/10/2022