Inflation Mindset Taking Root in Japan Boosts Case for BOJ Hikes

Inflation Mindset Taking Root in Japan Boosts Case for BOJ Hikes

Higher inflationary expectations and price tolerance are taking root in Japan, a development that supports the central bank’s moves to normalize policy and raise interest rates further.

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(Bloomberg) — Higher inflationary expectations and price tolerance are taking root in Japan, a development that supports the central bank’s moves to normalize policy and raise interest rates further.

A recent survey by Tsutomu Watanabe, a leading inflation expert in the nation, found that Japanese consumers’ tolerance of price changes is holding up and is higher than levels seen among shoppers in some other major economies. The survey showed for the third-year running that more than half of respondents would continue to buy a product at the same supermarket even if prices rose by 10%.

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The result is another indication that Japanese consumers are accepting inflation for the first time in decades and are shedding their reputation for being among the most price-sensitive consumers in the world. The survey, which has been cited by the Bank of Japan in the past, suggests Japanese are more resigned to price hikes than their peers in the UK, Germany and Canada.

A government report last week showed a key price gauge rose by 2.6% in March, keeping price growth at or above the BOJ’s 2% price target for a full two years. It’s forecast to accelerate this summer. 

“This is a big shift for Japan’s economy,” said Tomo Kinoshita, global market strategist at Invesco Asset Management, commenting on the report. “Unless there is a huge policy mistake, Japan probably won’t go back to a deflationary mindset.”

For now the risk for Japan’s price expectations is to the upside, with the prospect of elevated oil prices due to the escalating conflict in the Middle East, and with the yen trading around a 34-year low. Energy prices and the currency have historically been primary drivers of price swings in the nation, which relies heavily on imports for food and energy. 

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An upward shift in inflation perceptions makes price growth stickier as the BOJ counts it as a key element to support price growth. The bank concludes a two-day policy gathering Friday after ending its massive monetary easing program last month. BOJ watchers expect authorities to stand pat Friday, with a focus on any shift in the assessment of upside risks for hints to the timing for an additional interest rate hike.

Japanese households expect annual price growth of 5% over the next five years, marking the highest rate for eight straight quarters, the longest streak in data going back to 2006, according to a quarterly BOJ survey released on April 12.

The central bank’s Tankan data this month revealed that Japanese businesses see the annual inflation rate at 2.1% five years ahead, staying at the highest level for five quarters in data going back to 2014.

“Following decades of little to no inflation, there are signs that the recent inflation episode has led more firms to raise prices,” Louis Kuijs, S&P Global Ratings’ Asia-Pacific chief economist, wrote in a report on April 17. “The spike was kickstarted by higher commodity and energy prices and currency depreciation. Importantly, firms’ inflation expectations have risen.”

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The International Monetary Fund echoes that view, projecting Japan’s price growth will stay above 2% through 2025. Nada Choueiri, its mission chief to Japan, expects the BOJ to achieve its sustainable inflation target. 

“The usual consumer mindset for somebody who lives with inflation is starting to appear in the Japanese economy,” Choueiri told Bloomberg last week.

Wage growth will be a key to anchoring expectations at around the BOJ’s 2% goal. Rengo, Japan’s biggest umbrella group for labor unions, has reported that this year’s wage negotiations resulted in the biggest pay increase in three decades, boosting expectations for real wages to turn positive sometime this year.

“Inflation expectations have changed,” said Junki Iwahashi, economist at Sumitomo Mitsui Trust Bank. “Still it’s uncertain if they will be anchored at 2% as the BOJ aims for. Wage increases are very important.”

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