Japan: Where is the momentum for higher prices? - Nomura

Japanese corporations’ outlook on prices over the medium and longer terms has stabilized considerably, according to Takahide Kiuchi, Executive Economist at Nomura.

Key Quotes

“According to the “Inflation Outlook of Enterprises” released on 3 April as part of the BOJ March Tankan, surveyed enterprises’ average inflation outlook for five years from now was for a 1.1% y-y increase in prices, matching the result of the previous survey back in December 2017. Enterprises’ outlook on inflation has now held steady at that level for six straight surveys since the December 2016 survey. Meanwhile, February all-Japan core CPI (ex-fresh food) was +1.0% y-y, up from just +0.1% y-y in February 2017.”

“The rise in the inflation rate over the past year is in large part due to the increase in typically volatile energy prices, but this impact from energy prices has now subsided. In addition, the strengthening of the yen seen since the start of 2018 will eventually begin to weigh on CPI. From that perspective, it would appear that CPI has little room for improvement. The actual inflation rate is thought to gradually correct towards the medium- and long-term expected inflation rates. From this perspective, we should expect the inflation rate to rise when the medium- and long-term expected rates are higher than the current rate. However, the all-Japan core CPI for February was +1.0% y-y, nearly the same as the +1.1% rate expected by enterprises five years from now.”

“In other words, the current actual inflation rate and the medium- to long-term expected rate are essentially the same, a situation that can be considered to be a state of equilibrium. If we assume the current medium- to long-term rate represents an inflation rate indicative of a level of price stability that corporations and households find comfortable, then we have more or less reached that level. In other words, the BOJ has already fulfilled its mission of achieving price stability. In that case, we may need to consider whether it is appropriate for the BOJ to continue targeting a higher inflation rate.”