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Japan’s core consumer price index up 0.8% in December on oil, transport, food price surges

The big story this morning is that “inflation has doubled in Japan” and “inflation hits 10 year high in Japan.”

Those, may be true, but let’s take a look at what actually happened with consumer prices in December. As Always, we need to point out that there are four different Consumer Price Index readings released by the Statistics Bureau each month. These are the ‘general’ index, ‘general’ excluding rent, the ‘core’ index and the ‘core’ index without energy prices included. Thus, Japan includes energy costs in core CPI. Looking at the data, we see how that plays out:

• December general nationwide consumer price index: +0.7%
• December general nationwide consumer price index (excluding rent): +0.9%
• December nationwide core CPI (excluding fresh food): +0.8%
• December nationwide consumer price index (excluding fresh food and energy): -0.1%

As in November, we are clearly seeing prices driven upward by high oil and food prices. Still, the 0.8% rise in core CPI is significant, as we have not seen such a leap since March 1998, when a 1.8 percent jump was registered.

Is it right to call these numbers ‘inflation’ in so many headlines? One story that did so, Reuters’ “Japan inflation hits 10-year high” quotes Morgan Stanley’s Takehiro Sato as saying:

The higher prices were mostly driven by food and energy, meaning they are deflationary, as nominal incomes remain weak. The near-term trend for the central bank is steady to lower policy, and after a new BOJ governor is named a new initiative may emerge…

Ok! That last part is interesting, but gets away from what we were interested in, which is the continued use of the word “deflationary.” Another word we’ve heard in conversation but not yet seen in print came up at a Bloomberg article this morning. Again, from Mr Sato:

Japan is experiencing a sort of soft stagflation this quarter. Price increases combined with sluggish demand will cut disposable incomes and weaken consumption further.

Stagflation - or what Bloomberg calls “Soft Stagflation.” We still have to see output numbers decline a bit more before really calling the current phenomenon stagflation, but we agree with the essential thrust of what Mr Sato is saying. These are dangerous times for the Japanese economy. Higher oil and food prices hurt households without helping profits. As we know, wages aren’t increasing. Over half of GDP comes from domestic spending, and export growth is slowing.

Let’s cut to the chase and look at how price changes in the various categories played out in December:

• Fuel, light and water charges: +3.6% (+2.2% in November)
• Transportation and communication: +2.6%
• Food: +0.9% (+0.9 in November)
• Education: +0.7%
• Clothes and footwear: +0.6%
• Miscellaneous: +0.5%
• Housing: +0.1%

• Medical care: -0.4%
• Reading and recreation: -0.8%
• Furniture and household utensils: -1.7%

We know that households cut spending 0.6% in November, and the December figures are due soon, so we’ll be very interested to see if this trend continues. Households might be prompted to be even more on their guard after it was announced this week that electricity and gas providers intend to increase the rates for the upcoming April-June period.

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