BOJ Inflation Revision: Updated Jan. 31

 Article Source:   https://mainichi.jp/english/articles/20220118/p2g/00m/0bu/030000c

Article:

TOKYO (Kyodo) -- The Bank of Japan on Tuesday lifted its inflation forecasts for the next fiscal year, reflecting higher raw material costs and the effect of a weaker yen, but maintained its easy monetary policy as the 2 percent target is still far off and surging COVID-19 cases are raising uncertainty.

In an outlook report released after a two-day policy-setting meeting, the BOJ projected the core consumer price index, excluding volatile fresh food items, would rise 1.1 percent in fiscal 2022, revised up from its earlier estimate of a 0.9 percent gain.

The Japanese central bank also lifted its fiscal 2022 growth outlook for the economy to 3.8 percent from 2.9 percent projected in October, despite mounting concern over the rapid spread of the Omicron variant.

Ideas:

Estimates are just guesses, despite all of the computer modeling and looking at all of the possible variables forecasts are still just guesses as no one knows exactly what is going to happen in the future. Economists and forecasters, maybe now using more reliable forms of data science still can't completly predict 100 percent what might happen.

Just how is the omicron variant going to affect consumer spending or consumer behavior is hard to say at this time. Consumers and people sometimes, as are companies are sometimes unpredictable and they don't exactly do what they say in surveys and so on as the economic environment changes from day to day with the virus situation.

But its very clear prices are increasing but just how are businesses and consumers going to respond to price increases is also unclear. 

Are business going to pass on their supply costs to the next in line or are they going to absorb their supply cost increases which might limit their options for other kinds of economic activity, such investments, other projects, and salary increases as maybe their profit margins are now thinner and they have no room for other economic activities.

Are consumers going to delay spending, are they going to find substitutes, or even find places that haven't increased their prices in the future.

And then add in increased energy prices for both businesses and households that places a contraint on even more spending, as for example, for consumers, they have less disposable income now to use in the economy.

Article:

The central bank decided to continue with its yield curve control program, under which it sets short-term interest rates at minus 0.1 percent while guiding 10-year Japanese government bond yields around zero percent to keep borrowing costs at low levels for companies and households.

"A pickup in Japan's economy has become evident as the impact of COVID-19 at home and abroad has waned gradually," the BOJ said in the quarterly outlook report, an upgrade from its previous assessment that the economy was in a "severe" state due to the pandemic, though it had picked up as a trend.

Reflecting budding signs of inflation in Japan, the BOJ also changed its view on risks to prices, saying they are "generally balanced," rather than "skewed to the downside" as stated previously.

Ideas:

Its a good idea that the Bank of Japan, BOJ, has kept is rates low as the Japanese economy is a long way from being at the pre-pandemic level. And now that the omicron variant has exploded in Japan, some sectors such as the services sector again and still might be in a very bad situation.

An economy is a very complex ogranism with not all parts responding exactly to the same to different actions that might be taking place. For some sectors and businesses the pandemic might have had a minimal affect while some sectors might have had some devestating affects from the pandemic.

Yes, the inflation situation might be a more balanced action instead of just affecting one area but instead might be affecting different areas. Such as companies and their supply costs. wholesalers, importers, consumers or the last part of the supply chain.

That doesn't mean that inflation is spread-out evenly but inflation seems to be affecting all parts of the economy.

But for whatever reason, Japan hasn't had the inflation challenges that the EU and the US has had recently. For example inflation in the US has risen to around 6.8 percent which is the highest in over 40 years.

So even if the consumer price index is 1.1 percent that's long way from being servere or serious inflation that many contriies are experiencing globally.

But it needs to be remembered, for some groups, even a 1.1 percent increase in prices might be a financial burden for them such as fixed income groups, lower-middle class groups, and even the middle-class related to food that they buy in supermarkets, as these groups now have to contend with increased home energy price increases too.

Article:

Higher input costs have gradually led Japanese companies to pass them on to consumers through price rises.

Still, such pass-through to consumers remains modest when compared with surging wholesale prices, a sign that many companies are choosing to absorb cost increases rather than risk hurting demand with immediate price hikes.

In November, the core CPI rose 0.5 percent from a year earlier, its sharpest increase since February 2020.

Emerging signs of rising prices, at least in core consumer inflation figures, are good news for a central bank that has spent years trying to achieve a 2 percent inflation target with aggressive monetary easing.

Ideas:

Most likely the idea of not passing on costs or all of their costs might have something to do with the business/customer relationship in Japan.

 While business is business meaning in a market economy, costs are usually passed on as a way to remain profitable and stay in business, the Japanese business and customer relationship might a little different and might precede the idea of always passing their increased costs to the consumer or next in line such as from business to business, as a way to maintain the all important relationship that businesses have with each other and with customers.

Inflation especially consumer demand inflation has a long way to go before it reaches the 2 percent level that the Bank of Japan has been pursusing since around 2014. But while it might seem like a good idea to reach the 2.0 level, and might look like consumer spending is finally at a level in the Japanese economy that is healthy for the economy, it might not ever happen.

There might be several reasons while it might not happen. First 2022 is not the 1980's when Japanease spending was probably more free-wheeling as the economy was growing at record levels beforet the asset bubble crash a few years later.

Another reason, despite the free-wheeling 1980's Japanese households and society for the most are more savers and not like free-spending US consumers. But that can be both a positive and a negative as a market economy needs a certan level of consumer spending to grow and it might not enough now or not at the level it should be.

And then there is the ageing situation which might be affecting consumer spending. As Japan and South Korea are usually one and two in terms of age increases and they go back and forth each year as to which one is ageing faster. Older groups usually spend less than the younger groups.

There is also the problem with increases in salaries which maybe has been a factor is consumer spending not being where is should, as has been reported that many companies haven't increased salaries for many years.

Its understandable that Prime Minister Kishida has strongly suggest that companies increase salaries by at least 3 percent as a way to increase consumer spending in the economy, meaning Prime Minister's idea of "spreaing the wealth" throughout the economy. 

The idea is it turns into a multiplier factor meaning as employees/consumers have more income, they might save some of it but at the same time spend some of it. And then at businesses where consumers spend their extra income will also benefit from the salary increases meaning the overall economy benefits.

Its been suggesed or reported that businesses are sitting on record levels of cash in the banks and the Bank of Japan has for many years been trying to get them to use it by increasing the salaries of employees but with not much success.

Article:

The rising trend of prices also stems from the yen's depreciation, a byproduct of the BOJ's bold monetary easing, as it inflates import costs, a headache for resource-scarce Japan. BOJ watchers say the prospect of a diverging monetary policy from the U.S. Federal Reserve, which is moving toward tapering bond buying with interest rate hikes seen on the horizon, is also behind the softer yen.

The sustainability of rising inflationary pressure, however, is in focus as the current bout of inflation is largely due to higher commodity prices, not strong domestic demand.

Yuichi Kodama, chief economist at Meiji Yasuda Research Institute, said cost-push inflation is unlikely to last long.

Ideas:

Because of the weak yen Japanese importers probably have no choice but to pass on their increase costs to the next in line, most likely wholesalers. But wholesalers might be more reluctant to pass on costs to the next in line, meaning other businesses.

Its seems the Bank of Japan doesn't move in lock-step with what the US Federal Reserve does as Japan's economy is different than the US economy and as such each country's central bank has to do things a little different for the good of the economy.

Yes, higher commodity prices in Japan seems to be where most of the inflation activity is taking place and not strong domestic demand or strong consumer spending, as already mentioned consumer demand or consumer spending, for many reasons, has never been at the level that the Japanese economy needs or what the Bank of Japan wants.

Cost-push inflation is nothing more than the passing of costs. But in Japan is seems its a business to business situation and not so much a business to consumer situation as again most likely businesses are very reluctant to pass some or all of their costs onto customers or consumers 

Yes some businesses might feel, at this point, they have no choice but pass some of their costs onto their customers, but mostly likely in Japanese custom, they posted signs etc.apologizing for the increase in prices as they had no choice and they hope their customers understand and will continue to buy from them. 

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"Despite the upward revisions, concerns about accelerating inflation are not comparable to those in other advanced economies and the BOJ's inflation target is still out of reach," Kodama said, adding he expects monetary easing to continue.

The core CPI for fiscal 2023 - when Governor Haruhiko Kuroda's current term ends -- is projected to rise only 1.1 percent, up slightly from the 1.0 percent rise projected earlier.

The Policy Board made no change to a program to buy exchange-traded funds with an annual upper limit of 12 trillion yen ($104 billion).

ideas:

The reasons as to why inflation has not reached the leve in Japan that other advance economies have have already been presented. An increase from 1.0 to 1.1 is nothing to be concerned about. Even if we add in data variances it might to 1.0, 1.1, 0.5 etc. 

Most central banks in advanced countries prefer to see inflation between 2.0 to 4.0 as they feel in that range an economy has the right amount of econmic acitivity including consumer spending.

But the Japanese economy has not been even close to the 2.0 level for many years maybe even decades.

So the Bank of Japan's goal of reaching the modest level of 2.0 seems to be far out of reach at this time, and just maybe not reachable for a very long time if ever.

But maybe its time to think of the Japnease economy as having a completely different frame-work or infrastructure than other advanced economies and the regular rules or principles of a normal market economy don't always fit how the Japanese economy works compared to other advanced economies.

Perhaps a completely different way of thinking a completely new paradigm about the Japanese economy needs to be re-imagined to solve or fix some challenges such as the low inflation rate in Japan.

Have a nice day and be safe!