Soaring prices are haunting consumers and baffling economic planners in the United States and other countries, but not in Japan, where triggering inflation has proven to be an elusive goal.
As the Federal Reserve and most other central banks shift into a fight against inflation, the Bank of Japan said on Friday that it would reduce corporate bond purchases to pre-pandemic levels. But it will continue to pump tens of billions of dollars into the economy in hopes of eventually meeting its elusive 2% inflation target and accelerating economic growth.
With outbreaks of the omicron variant of the coronavirus looming in many parts of the world, “strong uncertainties” persist, he said.
The chances of hitting that target anytime soon remain “slim,” Capital Economics’ Marcel Thieliant said in a report. “The result is that the Bank of Japan will remain among the few central banks not to tighten policy for the foreseeable future.”
Inflation was 0.1% in October. Excluding food and energy price volatility, it was negative. The Bank of Japan is forecasting 0% inflation for the fiscal year ending in March.
In contrast, consumer prices in the United States rose 6.2% in October over the previous 12 months, the highest in three decades.
During the pandemic, the Federal Reserve and other central banks unleashed a barrage of monetary stimulus similar to Japan’s, taking interest rates to record highs in some cases. Now that the United States and other economies are on the mend and prices are skyrocketing, the Federal Reserve and other central banks are working to curb that without stifling economic recoveries.
With US inflation approaching its highest level in 40 years, Fed policymakers on Wednesday announced plans to cut monthly central bank bond purchases twice as fast as expected. This puts it on track to start raising interest rates in the first half of 2022.
On Thursday, the Bank of England became the first central bank among major economies to raise interest rates to fight inflation, which hit 5.1% in November.
Some Asian central banks had already started to increase their interest rates. New Zealand raised its benchmark interest rate in October and again in November, from a record low of 0.25% now to 0.75%.
The Japanese economy began to slow in the early 1990s with the collapse of a financial bubble and never really gained momentum. Businesses are reluctant to hire, raise wages or invest, given the grim growth prospects of a country with a rapidly declining aging population. The fight against deflation, or falling prices, has been the priority.
For almost a decade, the Bank of Japan has been purchasing huge amounts of government bonds and other assets to keep borrowing costs in the world’s third-largest economy near zero and, theoretically, to incentivize consumers and companies to spend more to cope with future price increases. The benchmark interest rate has been minus 0.1% for years.
Rents are still at about the same level as 30 years ago and the prices of most consumer goods have increased, but not as much as elsewhere. With wages flat or falling and taxes rising, cautious buyers tended to tighten their belts.
“Inflation in Japan remains subdued,” says Sayuri Shirai, professor at Keio University in Tokyo and former board member of the Bank of Japan.
Japanese retailers, restaurants and other businesses are loath to pass higher costs on to their price-sensitive consumers. Aeon, one of Japan’s largest retail conglomerates, recently announced a “price freeze” until the end of the year “in order to support our customers at a time when the prices of premier products need increase ”.
But even Japan, which imports much of what it consumes, is not entirely immune to soaring prices across the world, and some of the higher costs paid by consumers elsewhere can be slow. to catch up.
Wholesale inflation hit its highest level in 40 years in October, at 8%. Manufacturers and farmers are feeling the pressure of rising costs, especially for fuel.
The costs of gasoline and other fuels, as well as electricity and gas prices, have skyrocketed. Some food brands have announced plans to raise prices next year, to offset the higher costs of wheat, potatoes and other imported products.
Car prices have increased as automakers cut production due to a shortage of components, Capital Economics’ Tom Learmouth said in a report. He predicted that inflation will hit 1.3% next year, but then fall again.
And then there’s “stealth inflation,” known elsewhere in the world as shrinkage, as manufacturers increase their profit margins by selling less of the same products – shrunken candy bars, lunch boxes, tissues and dumplings. of rice, for example – for the same price, often claiming that small portions are more suitable and appreciated by aging Japanese consumers.
Shirai also expects inflation to accelerate somewhat, especially when the impact of lowering mobile phone charges this year wears off by next April.
“But it’s hard to see 2% inflation,” Shirai said. “Japanese consumption remains weak and companies are unable to fully pass these costs through to retail prices.”