Is Inflation Good News for Japan?

The recent spike in the price of food and oil, combined with a slowdown in the world economy caused by the credit squeeze, are bad news for most countries. Yet, may it be different for Japan?

Indeed, during the last few months' inflation in Japan accelerated to the levels not seen in decades, reaching 1.2 per cent in the year to March 2008. Although that figure is low when compared with the 1-3 per cent range that most developed country central banks are comfortable with, it's the highest inflation Japan has had for 10 years. In fact, some economists see the rise in headline inflation as an opportunity for the country mired in deflation for the best part of a decade. They believe that the high inflation connected with a low nominal interest rate may stimulate the economic activity and create the expectations that prices will continue to rise in the future.

However, in our view the current nature of inflation may have a negative influence on the Japanese economy since the current price rises are concentrated in items frequently purchased by consumers like groceries and gasoline. On the other hand, the CPI continues to decline in items that people purchase rarely, such as computers and cars. Indeed, with the economy slowing down it is unlikely that the increase in prices go beyond food and energy since wages are not growing. In fact, high headline inflation is likely to have a negative impact on corporate profits and consumers' purchasing power.

Anna Fedec
6/17/2008 12:46:03 PM