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Most developed economies are fighting against inflation, but Japan has been struggling to move prices in the opposite direction. The Bank of Japan (BOJ) craves inflation which has been largely missing since the spectacular bust of asset bubbles in the early 1990s. Notwithstanding the “Abenomics” reforms that shored up growth in the 2010s, and higher headline prices post-pandemic, underlying consumer price inflation (excluding imported costs such as energy) remains weak. The BOJ forecasts inflation soon slipping below its 2 per cent long-term target to 1.7 per cent.
Japan has long since escaped the deflationary trap it fell into in the ‘lost decades’ of the 1990s and early 2000s. But the current challenges of below-target ‘lowflation’ are also pernicious. Wage growth offers some hope on this front. Some big Japanese employers have recently delivered the largest annual pay rises in as many as 30 years to retain workers amid a tight labour market. Just as important to watch, in our view, is consumer behaviour: whether households will continue to hoard cash in savings, as they had done for decades, believing that the economy -- and prices -- will chug along sideways.
This week’s Chart Room indicates there could be a shift in mentality. Seasonally adjusted retail sales surged to a new record in March, when Japan scrapped the last of its Covid measures. The numbers are on a 13-month rising streak, and March saw the biggest year-on-year gain in almost two years. To get the full picture, we set the timeframe of the chart back three decades -- to capture the last retail sales milestone and going all the way back to a key consumption tax hike in 1997.
For the first time in decades, inflation expectations have been rising steadily among consumers, convincing them to spend now rather than later. If the US post-pandemic experience is anything to go by, above-trend spending in Japan has yet to reach its full potential. Tourist receipts have a lot of room to run. Visitor arrivals from China, for one, are only 8 per cent of January 2020 volumes (Japan remains one of Chinese tourists’ favourite destinations). More fuel for the consumption engine bodes well for new jobs in services and adds to the case for unwinding a monetary policy approach that has kept benchmark rates in Japan at or below zero for more than a decade.
None of this is to pinpoint when Japan’s central bank will exit its policy of yield curve control (YCC) and negative rates. But directionally at least, a dose of retail therapy could be just the cure for the BOJ’s lowflation headache.