Consumer Price Inflation in Japan: A 2022 Black Swan
Comment of the Day

December 29 2021

Commentary by Eoin Treacy

Consumer Price Inflation in Japan: A 2022 Black Swan

This article by Mark Cudmore for Bloomberg may be of interest to subscribers. Here is a section:

A genuine inflation scare in Japan is hard to envisage, but that’s why it’s a real black swan risk -- a very low probability outcome with large repercussions. In contrast to the rest of the world, Japan has spent 2021 again vainly fighting consumer price deflation.

The immediate news peg is that Japanese industrial production this morning printed the largest month-on-month gain ever seen in data going back more than 43 years. Absolutely smashing expectations at 7.2% vs 4.8% forecast, which gives some idea of how much economists and markets might be underestimating the evolving story in Japan.

We also got the news that broker Daiwa Securities Group Inc. is preparing to raise base salaries for the first time in four years “because the prices of gasoline, food and other items closely linked to everyday life are clearly increasing,” said Chief Executive Officer Seiji Nakata in an interview with Bloomberg. This comes as the government is further pressuring companies to increase wages.

But the key point is that basic input costs are increasing -- Japan is a major energy importer amid a European energy crisis that is having global ramifications. Japan is seeing the fastest producer price inflation in more than 40 years, at 9% y/y, in a dynamic that economists, in aggregate, have underestimated for the past 12 months in a row.

Into this world of rising input prices and rising wages, we have record Japanese fiscal stimulus and extremely easy monetary policy.

Japan 2022 CPI is forecast at 0.7%, according to consensus forecasts on Bloomberg. But economists have proved spectacularly poor at anticipating inflation in 2021. Japan has a government debt pile that is ~250% of GDP -- a crazy burden which is easy to fund cheaply when no one fears any inflation threat ever. But it will result in an immense amount of losses for the largely domestic holders IF yields ever start a sustainable climb.

Eoin Treacy's view

Rising commodity costs are putting upward pressure on inflationary expectations everywhere. Since Japan has been among the most aggressive in pursuing simultaneous monetary and fiscal stimulus, it is reasonable to expect that inflationary pressures will build.

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