Japan Inflation Estimate: Updated Nov. 1, 2023

 Article Source:  https://mainichi.jp/english/articles/20230720/p2g/00m/0bu/040000c

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TOKYO (Kyodo) -- Consumer inflation in Japan will accelerate faster than previously estimated to 2.6 percent in the fiscal year ending next March, the Cabinet Office said Thursday, well above the Bank of Japan's target.

The government had estimated that consumer prices, which include energy and volatile fresh food items, would rise 1.7 percent in fiscal 2023. For fiscal 2024, prices are estimated to gain 1.9 percent.

Ideas:

Consumer inflation, off the most part, is an individual situation as all consumer don't buy the same products or use the same services. For some consumers inflation might be a major challenge while for some consumers inflation might not be a concern.

Consumer inflation at 2.6 percent might be a major challenge for the lower income groups but hardly noticeable for the higher income groups.

It should be remembered, that maybe in 2020, 2021, and 2022, inflation increased so even if inflation increased  just 1.7 or 1.9 percent in 2023, consumers have seen inflation increase many times the past few years.

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The economic outlook for fiscal 2023, meanwhile, has been downgraded by the government amid slowing export growth. Japan's real gross domestic product is now forecast to grow 1.3 percent, instead of the 1.5 percent projected in January.

The revised forecasts were presented at a meeting of the Council on Economic and Fiscal Policy on Thursday as its members debated a budget framework for the next fiscal year.

Ideas:

Even if the Japanese economy only grows 1.3 percent instead of 1.5 percent, that is still good growth for Japan, as GDP growth in the past sometimes doesn't even reach 1.0 percent.

Exports are a major economic driver of the Japanese economy, meaning exports are very important for economic growth in Japan.

The major challenge for Japan and exports is China at this time, as exports to the US are strong due to demand for Japanese cars.

But China, again, has it own economic challenges which might be constraining exports to China.

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Aggressive interest rate hikes by major central banks in the United States and Europe are threatening to curb demand for Japanese products.

A growing number of Japanese firms have been passing on higher import costs to consumers and raising wages to help cope with the rising prices of everyday goods. Private consumption and capital spending, key components of domestic demand, have been relatively resilient.

Ideas:

An increase in interest rates might be a positive or even a negative depending on the situation. In general, higher interest rates might constrain or depress spending in an economy including foreign products such as Japanese cars.

But at the same time, the variance between the US exchange rate and the Japanese yen, exchange rate. make the yen, weak, which in theory makes it better for Japanese exporters to sell their products at a higher price in the US. 

Japan, South Korea, and China all compete in the US market as they all make similar types of products.

The challenges is if the yen, the exchange rate gets too weak, it cuts into Japanese exporter competitiveness related to cheaper South Korean or Chinese products, such as cars.

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The expected rise in consumer prices, including for perishable food items, follows the 3.2 percent jump seen in fiscal 2022, the biggest increase since fiscal 1990.

Prime Minister Fumio Kishida, who is pursuing an economic agenda of wealth redistribution and increased growth, said the economy has seen positive developments, such as pay hikes and an increased appetite for investment among corporate sector actors.

Ideas:

Add in the 3.2 percent increase in 2022 and the 1.9/1.7 percent increase in 2023, makes it even more challenges for Japanese consumers.

But inflation is not always a bad thing as inflation sometimes indicates more economic activity and more spending in an economy.

But in this case, it might just be companies passing-on their raw material and energy costs to the next in the supply chain, including the final customer.

Wages might have increased but are the enough for consumer to feel good enough to continue spend despite the inflation challenges.

Companies usually don't invest or spend unless they feel the economic conditions are in their favor in the future. 

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"We need to pay due attention to the impact (of inflation) on real household incomes. Taking into account the viewpoint of ordinary people, the government will carefully look at economic and price conditions," Kishida told the government panel meeting at his office.

Entrenched inflation without robust wage growth would deal a significant blow to households, and real wages have been falling for months in Japan.

Ideas:

Inflation has been increasing, for the most part, since 2020, but it seems the Japanese government is just now beginning to see it can be a major challenge for Japanese households.

The BOJ or the Bank of Japan, has taken a hands-off approach to inflation compared to what the US and EU are doing. The BOJ has basically just let inflation runs it course and always saying inflation is only temporary.

Even though its been reported that companies gave an average of 3+ percent in wage increases that might not be enough to overcome the consistent inflation challenges in Japan.

And not all companies gave wage increases as many small and medium sized companies might not have been able to increase wages.

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Still, Japanese firms agreed to an average pay hike of 3.58 percent at annual negotiations with labor unions, the best outcome in three decades.

The BOJ, for its part, has not budged over its stance of maintaining ultralow rates despite quickening inflation, as it seeks to ensure pay hikes continue so that it can attain its 2 percent inflation target stably.

Ideas:

Even at 3.58 percent in pay hikes, while better than nothing, its maybe not good enough to create a better consumer spending situation for consumers as maybe the 3.58 barely covers inflation and or maybe doesn't cover most of inflation.

And then again, many companies did give wage increases but many companies didn't give wage increases which is going go create a wage-income inequality situation in Japan of haves and have-nots eventually.

The BOJ strategy and the US strategy would seem to be in direct conflict as the US Federal Reserve are using what they think is best of each economy. 

The major challenge of course is that the variance in key rates have a major affect on the exchange rate,which causes the Japanese yen to be weak and US dollar strong.

Of course this could be the strategy of the BOJ in that a weak yen is good for Japanese exporters as they can get more for the products, such as cars they sell in the US.

But its a major challenge for the Japanese domestic economy too has it causes imports from the US to be more expensive.

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The central bank is scheduled to update its economic and price outlooks when it holds a two-day policy meeting next week. The core consumer price index, which excludes volatile fresh food items, is forecast to gain 1.8 percent in fiscal 2023 and then 2.0 percent the year after.

The BOJ's fiscal 2023 forecast as of April is more conservative than the average 2.6 percent increase expected by private-sector economists, who were polled by the Japan Center for Economic Research.

Ideas:

Not all economic organizations have the same estimates on what is going to happen in the future. An economic outlook, or estimate, is nothing more than a "guess" as to what is going to happen in future. 

And many organizations, including the BOJ, always come back and revise up or down their estimates as they get new new information and new data.

So all outlooks should be take with a grain of salt, meaning again, they are just a guess and probably will be revised up or down in the future.

Again the core consume index is just a number and it could affect consumers or not affect consumers depending on their economic situation.

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But they expect core CPI to rise 1.67 percent in fiscal 2024, slower than expected by the central bank.

Resource-scarce Japan has been grappling with higher energy and raw material costs, magnified by a sharp drop in the yen.

Ideas:
A CPI increase of 1.67 might not seem like much but if you add in all of the increases since 2020 that could be close to 4 percent inflation in Japan since 2020.

Inflation might actually be decreasing but the challenge is when can consumers begin to not feel the affects of inflation or see continuous month after month.

Japan, as a resource-poor country, is always going to have import challenges with maybe raw material costs and energy costs, and if the Japanese yen remains weak it means imports prices are going to continue to be higher than normal.

The key might be for Japan and the US to enter into some kind of free/fair trade agreement that sets prices at a certain despite the exchange rate fluctuations. 

Of course some say that is like a fixed exchange rate instead of the global standard of a floating exchange rate.

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 The government has been reducing utility bills for households by lowering electricity, gasoline and kerosene prices, a move likely to curb CPI by around 0.5 percentage point in fiscal 2023, according to the government.

Private sector members of the government panel proposed that such subsidies should be phased out or scrapped. They also said that there should be more focus on supporting low-income families hit hardest by rising prices as the government shifts from COVID-era, crisis-mode spending to a more "ordinary" budgetary policy regime.

Ideas:

Its good that the Japanese government has been implementing some kind of price controls on home energy costs, but the challenge is always when and how to do it. Too much as it might have an affect on the market economy. Too little and it might have any affect on households at all.

And then there are the wholesalers of energy, what is the government doing to help them as their price keep going up but they have to reduce their sales to help households.

Of course there is always talk about when and how to end the subsidies, but the low-income groups, even in Japan need help as food inflation is still a major challenge for them.

This is a little ahead of this article but Prime Minister Kishida has proposed a 40,000 yen subsidy tax cut for citizens in Japan, which could really help low income families. 

Have a nice day and be safe!