Wholesale prices, the Bank of Japan and deflation

January 29, 2009
By Ken Worsley

In an opinion piece reprinted by the International Herald Tribune, Martin Hutchinson of breakingviews.com asserts that “Japan repeats its mistakes” from the 1990s by “injecting capital into failing companies through government banks.”

It’s difficult to disagree that a 6.5% increase in public spending is a bad thing, especially given Japan’s precarious demographic situation (for more on why the often-cited 6.5% increase in public spending might be a tad misleading (it compares initial FY2008 budget figures to FY2009, rather than what actually happened in FY2008), see the third paragraph of Edward Hugh’s recent post over at Japan Economy Watch. Personally, I don’t think the figure is misleading so long as a writer mentions that it may be somewhat misleading). At any rate, back to Hutchinson: one line in the article really caught my eye:

Japan has avoided the housing problems and stock market bubbles that have bedeviled Western economies, but it is again suffering severe deflation, primarily because of the yen’s sharp rise and the downturn in world trade.

Deflation is certainly a risk, and is looking ever more certain - tomorrow’s CPI figures will make the timing more certain. I’m expecting CPI with food and energy prices stripped out to be flat or slightly negative (-0.1% or -0.2%) when the numbers are released (it was flat in November).

Despite the fact that it seems early to call deflation in Japan “severe,” it might be within a few months, and I agree with the other 99% of the piece. Thus, it’s worth contrasting it to what Bank of Japan Deputy Governor Kiyohiko Nishimu had to say yesterday, as he seemed to indicate a lack of worry over deflation setting in:

It’s crucial to look at companies’ and households’ inflationary expectations over the medium to long term to determine whether the economy slips into a deflationary spiral.

It’s crucial to look at what companies and households expect? No, it’s not. To be honest, it’s disturbing to see a central bank board member citing public opinion as a “crucial” part of the monetary policy decision making process (although the Bank of Japan has essentially gotten out of that game for the time being - they’re looking into ways to artificially reduce TIBOR rates at this point).

It is important to look at what’s actually happening in terms of data. In December, wholesale prices rose 1.1% year-on-year, a drop off from the 2.8% seen in November, according to data released this week by the Bank of Japan. Wholesale prices rose 4.6% for all of 2008, showing an increase for the fifth consecutive year and the largest yearly increase since 1980.

Where were the rises seen in 2008? Petroleum and coal products saw a 23.6% increase, while steel prices shot up 20.0% and prices for scrap and waste increased by the same amount. In other words, it’s looking as though 2008 was the peak of a boom in wholesale price increases and we are very unlikely to see anything resembling a repeat in 2009. December’s 1.1% increase in wholesales prices was the lowest seen in the past four years, while wholesale sales were down 13.9% last month, according to the Ministry of Economy, Trade and Industry. Prices for petroleum and coal products fell 19.1% in December. The strong yen continues to hurt: export prices were down 14.9% in December.

At this stage, the return of deflation is looking more like a matter of when than if, and hopefully the problem is taken seriously this time.

Filed Under Bank of Japan, Economic Reports