Japan's Inflation Remains Weak; No Bazooka For Inflation Misses

Japan's CPI fell by 0.1% in February; the core CPI (ex food and energy) fell by 0.2% in the month. Of course, the Bank of Japan is not going to be happy with the inflation trend that now is wholly muted. But the Bank, and Japan as a nation, have bigger fish to fry. Attention is turning to growth and what might be needed to support it. The inflation target is going to remain, but inflation will soon no longer be the prime objective of policy.

Already inflation is low and falling. Sequential headline inflation is falling from 0.5% over 12 months to a pace of 0.4% over six months to a pace of zero over three months- poof! Gone! Core inflation is not trending lower, but it is stuck very close to zero with a 0.1% gain over 12 months, a 0.2% annualized gain over six months and a flat performance over three months.

Japan's inflation rate has faded from policy's objective and the combination of a U.S.-China trade war and now the impact of the coronavirus are playing out on Japan. Since China is Japan's largest trading partner, Japan's proximity to China probably puts it about one-month ahead of the transmission process compared to Europe and the U.S.

Quarter-to-date inflation in Japan is not showing worsening weakness, but it remains low at a 0.4% pace for the headline and at a 0.2% pace for the core. By category, quarter-to-date inflation is negative only for Foods & beverages and Reading & recreation.

12-month inflation shows a deceleration from its year-ago pace for Education, Medical Care, Miscellaneous, and Reading & recreation. Over 12 months, prices are falling for Education and Miscellaneous items. So deflation has not really set in. The inflation rate is low but not threatening to cross below zero-at least not yet.

Even three-month inflation shows few price declines by category, only for Foods & beverages and Reading & recreation. The worrisome trend is only in February where three of eight categories show prices falling month-to-month with four other categories showing no change at all month-on-month. In fact, in February the only category to show any price gain is ‘Miscellaneous' where prices rose by 0.1% month-to-month.

These trends begin to carve out a clear set of tradeoffs for Japan. It will need to dig into its fiscal bag of tricks that it had hoped it could keep tied tight and stuffed in the corner. Monetary policy will seek to find ways to support the economy too. But the inflation target will no longer be a significant determinant of policy.

Perhaps what is even worse for Japan is that the rhetoric between the U.S. and China has heated up again this time over China's sensitivity to being called out for its poor performance in letting the coronavirus take hold and spread. China has made several feeble attempts at denying its role and even hinted that the virus had a different source. The U.S. is not cutting China any slack on such revisionism. But President Trump continues to say that he and Xi continue to have a great relationship; maybe this carping is just something going on at lower levels in government and maybe it will not be part of a new dispute or conflict.

In the U.S. the President has been pressed to dismantle some of the tariffs claiming it will make the acquisition of medical supplies easier. But the President has so far stone-walled claims for any such action. The U.S. continues to hold Iran's feet to the fire and has ratcheted up some sanctions despite Iran also being seriously beset with the coronavirus. Also in the category of ‘things that do not change' are allegations that Russia has been putting out a program of disinformation to try to worsen perceptions of the risk from coronavirus. Whole nations have crafted a number of special policies and taken actions on fiscal and monetary policy as well as having ordered people to change behavior to try to put a stop to the spread of the virus… Still, Russia is meddling using the crisis for its advantage to sow discontent in its rivals. There are some things for which cooperation simply does not see the light of day.