Japan is now the world leader in inflation. At least among the world’s major economies.
This chart, tweeted by Tom Orlik of Bloomberg, shows inflation for the U.S., Eurozone, China, and Japan.
As you can see, Japan is the only major economy that has inflation running meaningfully above 2%, while Europe continues to flirt with deflation.
Japan’s inflation, however, has not come without some extraordinary measures from its central bank.
Last year, newly-elected Prime Minister Shinzo Abe announced a “three arrow” plan to jumpstart the long-lagging Japanese economy.
This plan involved a massive quantitative easing program, government stimulus, and structural reforms aimed at making Japan more competitive.
People call it Abenomics.
In a Bloomberg Brief report earlier this month, titled “Abenomics vs The Deflation Monster,” Bloomberg gave an update of how Abenomics was doing.
Overall? Call it two for three.
Japan’s fiscal and monetary stimulus measures are at least doing something.
Japan’s GDP has been mixed, and while first quarter GDP surged 5% annualized, this came ahead of a steep consumption tax hike which took effect April 1.
In the Bloomberg Brief report, Naohiko Baba of Goldman Sachs notes that since the BoJ launched its “first arrow” in April 2013, the central bank has purchased 70% of all newly-issued Japanese Government Bonds in total, and more than 100% on a net basis.
As a result, the Bank of Japan’s balance sheet has exploded in size as the nation’s public debt to GDP is the highest in the world.
And while Japan may have seen inflation tick higher earlier this year, long-term it is still running below the BoJ’s 2% target.
As part of the Bloomberg Brief on Abenomics, Bloomberg’s Tom Orlik and Jennifer Bernstein talked to Masaaki Kanno, chief Japan economist at JPMorgan Chase in Tokyo, who said that it will likely take into 2016 or 2017 for inflation in Japan to hit 2%.
Hitting its 2% inflation target however, could spell additional trouble for the BoJ.
Currently, Kanno notes, Japan is monetizing its debt.
Monetizing debt is a process whereby a central bank holds government securities it purchased — say through a quantitative easing program like the one Japan is currently undertaking — to maturity. After these bonds mature, the central bank returns money paid to it back to the government, effectively allowing the government to borrow money for free.
The interest rate on Japanese Government Bonds, or JGBs, remains historically low, as the BoJ is basically the only one buying them. But if the BoJ ever signals an intention to taper its pace of asset purchases, Kanno says, the bond market is likely to react negatively.
Kanno outlines a scenario in which the BoJ would only signal an intention to taper if inflation is at 2%, “so definitely no one will be willing to buy JGBs at 0.6% yield,” Kanno told Bloomberg.
This pushes bond prices higher, making it more expensive for the Japanese government to borrow, which limits its ability to undertake stimulus and puts any Japanese economic recovery at risk. Or worse.
On the U.S. front, inflation data earlier this month came in in-line with expectations.
The report showed that inflation rose 2.1% year over year, or 1.9% on a “core” basis, which excludes food and gas, though some expected the inflation number to surprise to the upside.
Through the spring, CPI in the U.S. had been accelerating, and many argued that if this trend continued, it could put pressure on Fed Chair Janet Yellen to raise interest rates sooner rather than later.
At its last FOMC meeting, Yellen said that the Fed is currently on track to finish its own quantitative easing program in October.
After that, the countdown will begin to the Federal Reserve’s first interest rate hike since 2006.
The most recent inflation data out of Japan suggests that through the second quarter, inflation remained above 3.5%. It is unclear, however, if the BoJ will act on this data.
Here in the U.S., it also appears that, at least for now, inflation will not force the Fed’s hand.