Inflation accelerated in Japan, and the core consumer price index rose to a 41-year high, even as energy fell. BOJ’s Ueda vows to let her rip

The Bank of Japan adheres to a policy of negative interest rates and yield curve control as inflation spreads throughout the economy.

By Wolf Richter for WOLF STREET.

As clear evidence that core inflation has spread across the economy, Japan’s core consumer price index — all items less fresh food and energy — rose to a new 42-year high of 4.1% in April from a year ago, outpacing all consumption tax increases. that previously led to short spikes in the consumer price index.

This newly revitalized rise in annualized core CPI was driven by a monthly rise of 0.7% in April (8.7% annualized), 0.6% in March, and 0.4% in February, according to data from Statistics Japan. office today. The graph shows a 3-month moving average of the changes from month to month, which infers some variables:

Energy prices have been dropping for months, As is the case everywhere, and in April it was down 4.4% from a year ago, having managed to get rid of the entire price hike since February 2022, and about a third of the rise since January 2021.

But food prices have gone up by 8.4% from a year ago, the worst inflation rate since 1980. On a month-on-month basis, the CPI for food increased 1.1% in April from March (at an annual rate of 14%), after 0.4% in March, 0.4% in February and 1.4%. % in January.

All items are inflated Acceleration back to 0.6% for the month, matching the jump in October last year, which was the worst in years. This time, however, the consumer price index jumped 0.6% on a monthly basis despite of Low energy prices, as inflation is now deeply embedded in the economy. On an annual basis, the overall CPI accelerated to 3.5%. Inflation exploded with the Bank of Japan’s April 2022 inflation target.

Major categories of inflation, year on year in April:

  • Food: +8.4%, worst since 1980. Fresh food: +5.3%. Less fresh food: +9.0%.
  • Meals outside the home: +6.6%.
  • Rent less than dwellings: +4.3%
  • Repairs and maintenance: +7.6%
  • Energy (gasoline, electricity, pipe gas, propane, kerosene): -4.4%
  • Household durable goods: +9.8%
  • Communication services: +7.8%
  • Clothes and shoes: + 3.8%
  • Clothing-related services 5.2%.

Governments rein in inflation as they control prices.

  • Health care inflation: In Japan’s universal health care system, the government largely decides what consumers have to pay:
    • Medicare: +1.7%
    • Medications: +1.6%
    • Medical supplies and devices: +5.7%
    • Medical services: +0.4%
  • Public transportation: +2.4%
  • Education: +1.3%

The inflation reversal was so bad that…

The new president of the Bank of Japan, Kazuo Ueda, has come out swinging, in favor of allowing inflation to run rampant, and thus allowing inflation to handle Japan’s massive government debt burden, and the Japanese people will have to eat it, so he speaks.

His comments were peppered with central bank hypocrisy, and may have been intentionally deceptive to prevent the bond market from causing massive bond selling in order to make any changes to the BOJ’s “yield curve control”. Under the current yield curve control, the Bank of Japan is keeping the 10-year JGB yield suppressed below 0.5% by threatening to buy unlimited amounts of long-term bonds.

The next step for monetary tightening will be to raise the target price of the yield curve again. But that should come as a surprise, otherwise the bond market will massively attack those yields upfront with a massive sell-off.

The Bank of Japan has already unleashed this kind of surprise on the market in December 2022 when it raised the peg cap on the 10-year yield from 0.25% to 0.5%. But it left its short-term policy rate unchanged in the negative, at -0.1%.

Therefore, today Ueda stuck to the strategy of surprise when he said in Tokyo: “The cost of impeding emerging developments towards achieving the 2% price stability target, which is finally on the horizon, through hasty policy changes, is likely to be very high.”

By “nascent developments,” he means inflation that is beginning to spread throughout the economy. Everyone knows that letting this inflation explode is the way Japan will solve its government debt burden. Debt burdens by all governments that control their currencies are eventually solved by massive inflation.

“It is appropriate that we take time to decide on adjustments to monetary easing towards an exit in the future,” he said.

“The Bank will carefully support these emerging developments until they mature and aim to achieve the 2% price stability target in a sustainable and stable manner, accompanied by wage increases,” he said.

By “achieving the 2% price stability target in a sustainable and stable manner,” he means allowing inflation to spread beyond 2% without letting it get completely out of control. This is what it looks like to me. And this may be the least bad option that Japan now has, after decades of overspending and printing money.

Once upon a time, there was real price stability…

In the two decades through 2021, the CPI for all items has remained in the same narrow band: a now-bygone era when moderate inflation and moderate deflation alternated to produce true price stability. As this graph shows of the aggregate CPI as an index value (not a percentage change), this era has now been replaced by the American style…

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