Chart of the week: Japan's inflation target still a distant goal
Changes in Japanese Consumer Price Indices (year-on-year change in %), 1994 - 2017
Source: Datastream, BNP Paribas Asset Management, as of 26/12/2017
On 26 January 2018, data on the rate of inflation for December in Japan will be published. In November, the core consumer price index (CPI), which includes oil products but excludes fresh food, rose by only 0.9% year-on-year, far below the Bank of Japan's 2% price target. And this despite enormous efforts by the BoJ to raise the rate of inflation. As the chart of the week above shows, inflation has been quiescent in Japan for decades (the increases in the rate of inflation in 1997/98 and 2014/15 were purely due to increases in VAT).
So what is to be done when a central bank has pulled out all the stops to reflate an economy but to no avail? Moving the goalposts is one strategy.
Japanese Economy Minister Toshimitsu Motegi recently suggested it is possible for the government to declare an end to deflation before consumer prices reach the BoJ's 2% inflation target. In his view, the government needs to look at several economic indicators to determine if it is appropriate to declare an end to deflation (source: Reuters). Another solution would be to lower the inflation objective to 1%.
GDP growth was 2.5% on an annualised pace in the third quarter of 2017 and the BoJ’s economic survey shows that major companies continued to fare well, with its Tankan index of large manufacturers' business conditions at a high since 2006. In December, BoJ governor Kuroda called for ‘patience’ despite signs of accelerating growth, while inflation remained below the target.
Written on: 19/01/2018
