A political decision to solve Japan’s terrible fiscal mess by fueling inflation and forgetting about that 2% target.
By Wolf Richter for WOLF STREET.
Outgoing Bank of Japan boss Haruhiko Kuroda and new boss Kazuo Ueda sang Friday from the same anthem that highlighted the worst inflation numbers since 1981: This inflation will go away on its own, and we’ll avoid the reckless negative maintain interest and money printing policies.
Kuroda is betting his entire tenure in the BOJ on this policy and now can’t back down no matter what inflation does, and inflation does; and Ueda cannot contradict Kuroda. In April he becomes boss and until then he sings from the same hymn. Eventually there will be a review of monetary policy, which will show that this policy worked very well, 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 fuel this inflation with all its might.
Japanese “core” consumer price index For all items, less fresh food, which the BOJ uses for its 2% inflation target, rose 4.2% in January from a year ago, the worst rate since 1981, according to Japan’s statistics office today. The index is now more than double the BOJ’s target, having passed all previous four peaks, three of which were caused by consumption tax increases. Inflation blew through the BOJ inflation target (purple line) in April 2022.
This time there was no consumption tax increase, but widespread and worsening price increases for a wide range of goods and services as inflation penetrates deeper into the economy.
The CPI for all items rose 4.3% from a year ago, also the worst inflation since 1981.
On a monthly basis, the CPI rose 0.5%, the biggest increase since October. In this entire period of inflation, there are only three monthly jumps of 0.5% or more (January 2023, October 2022 and July 2022). There is nothing slowing down this inflation.
This comes despite the government’s energy assistance program keeping inflation low; and despite large parts of the economy where almost all aspects of consumer prices are set or controlled by the government, including the large universal health care system, the public transportation system, and education.
Main inflation categories.
- Food: +7.3%, worst since 1980. Includes: fresh fish and seafood +17.2%; meat +7.6%; dairy products and eggs +9.5%; vegetables & seaweed (+3.4%); fruit (+2.7%); beverages (+6.3%).
- Meals away from home: +5.9%.
- Housing minus imputed rent: +4.7%
- Repairs and maintenance: +8.2%
- Household electricity, gas, water, sewage: +14.9%
- Durable household goods: +11.1%
- Communication: +7.1%
- Clothing and footwear: +3.1%
- Services related to clothing: 5.0%.
Governments control inflation where they control prices.
- Health care inflation: In Japan’s universal health care system, the government largely decides what consumers should pay:
- Medical care: +0.5%
- Medicines: +1.6%
- Medical supplies and devices: +1.2%
- Medical services: -0.3%
- Public transport: +0.6%
- Education: +0.7%
Bye bye price stability.
Between about 1993 and 2021, the consumer price index has remained within the same narrow range for all items, with some fluctuations in between, with the brief one-time jumps due to consumption tax increases. This was an era of mild inflation and mild deflation, the era of more or less real price stability, a rare occurrence in the modern world. And it’s over.
A political decision to stir up inflation to solve the fiscal mess.
Speaking at the G20 event in India, Kuroda said he expected inflation to be below 2% for fiscal year 2023, which begins April 1, and into fiscal year 2024. leave fiscal year 2023, so it’s not his job anymore to bring inflation back to 2% in fiscal 2023 and 2024. He ostensibly clings to the fiction that this inflation is “transient,” but he can say what he wants. It will be his successor’s job to deal with it.
His successor will be Kazuo Ueda. But he’s still not in that job, and his confirmation is still pending, so he won’t rock the boat until he even steps into it with both feet. He said today that the BOJ’s negative interest rate policy and money printing are appropriate. And like Kuroda, he still blamed this inflation on supply problems, a strategy that even the Fed abandoned a year ago after being toppled by it.
One thing is certain, even under the new leadership it will take the BOJ months to do anything, even just a monetary policy review, and inflation will be further fuel so it can rage in all its glory.
While inflation is unburdening Japanese households, it is also a way to eliminate Japan’s massive and unsustainable fiscal debt.
It is now clear that a political decision has been made to deal with this fiscal mess by ramping up inflation and actually fueling this raging inflation – and forget about that 2% target.
What else could they actually do? That’s always how this kind of insane fiscal debauchery and money printing ends: in raging inflation, which insidiously solves that fiscal problem at the expense of households – but it does solve that problem.
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