As hard as it tries, and despite mammoth bond-buying, Japan just can’t get prices to increase

  • Japan just can’t muster any inflationary pressures to speak of.
  • Excluding food and energy prices, inflation rose by just 0.2% over the past year. Even with those items, inflation only increased by 0.7%.
  • The BoJ has pledged to buy 80 trillion yen in Japanese government bonds per annum to boost inflationary pressures. On current form, it looks like it’ll be buying a few more yet.

Japan isn’t having much luck generating any inflationary pressures, if that wasn’t obvious already.

Indeed, without the help of soaring energy prices, they are next to nothing.

According to data released by the Japanese government, consumer price inflation (CPI) grew by 0.7% in the year to June, unchanged from the level reported in May.

Excluding fresh food prices, core CPI did pick up a little, increasing by 0.8% over the year, up from 0.7% in the 12 months to May.

Despite the small acceleration, the breadth of the increase narrowed with 52.2% of items increasing, down from 53.7% in May.

Excluding both fresh food and energy prices, so-called core-core CPI rose by a paltry 0.2% over the same period, the weakest underlying inflationary impulse since October 2017.

Put another way, almost all of the modest price pressures seen over the past year were driven entirely by energy costs.

As seen in the chart below, be it headline, core or core-core CPI, all three readings remain well below the 2% level targeted by the Bank of Japan (BoJ).


“The figures must be pretty disappointing for the BoJ because the rise in inflation was due almost entirely to energy costs. Prices of other goods aren’t rising much,” Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, told Reuters.

“Consumption isn’t strong so companies are struggling to raise prices. While the BoJ likely won’t ease policy, the hurdle for whittling down stimulus is quite high.”

The BoJ meets later this month with the soft result — leaving core CPI below its 2% target for a 38th consecutive month — increasing speculation the bank will cut its inflation forecasts.

In April, the BoJ forecast core CPI increasing to 1.3% by March 2019, and 1.8% by the end of fiscal year 2020. Both forecasts were below its 2% target.

When it last met in June, it downgraded its assessment on inflation, describing it as “in a range of 0.5 to 1%”. It previously stated it was moving “at around 1%”, adding to speculation it will cut its forecasts at its July 30-31 meeting.

For several years the BoJ has undertaken qualitative and quantitative easing (QQE), pledging to buy 80 trillion yen in Japanese government bonds per annum to help anchor 10-year bond yields at 0% in order to lower borrowing costs, boost investment and economic growth and, eventually, inflation.

As yet, it’s not had much success.

Without many other policy options at its disposable, it looks like the BoJ will be buying bonds for some time yet.