Mar. 29, 2013, 12:30 JST

A cold welcome to Kuroda from consumer price

CPI deflation hits the worst point in 2.5 years

Mr. Kuroda has work cut out as he sees his first CPI inflation report since becoming the governor. The report shows that in February 2013, the headline CPI fell by 0.7% year on year (YoY), the largest decline since September 2010. The core CPI excluding food and energy shows an even deeper deflation at -0.9% YoY. The advance March CPI report for the Tokyo area shows that the deflation has likely continued into March. It shows the headline CPI deflation at -1.0% YoY and the core CPI deflation at -0.8% YoY.


 Source: MIAC, CEIC, JMA


Deflation is widespread across various categories of goods

A breakdown by categories of goods and services shows that food was the main category that contributed to the deflation. Food prices fell by 1.8% YoY in February, contributing by 0.5 ppt to the overall 0.7% YoY deflation. There are other ample sources of deflation - housing contributed by -0.1ppt, furniture and household utensils contributed by -0.1ppt, and leisure durable goods such as TV contributed -0.3ppt. On the other hand, energy related categories such as electricity price and gasoline have together positively contributed to the inflation by as much as 0.4 percentage point. Overall, it shows that the deflationary pressures are real, and cannot be explained away by temporary factors such as the volatility in food prices.  


Merely buying more JGBs is not enough to raise inflation

In the confirmation process in the parliament, the new BoJ governors, led by Mr. Kuroda, have virtually pledged that they plan to achieve 2% CPI inflation in the next 2 years. Starting with the underlying deflation of almost -1% YoY, raising it to 2% YoY is a tall order, and achieving it in 2 years seems almost impossible. While the economic conditions are relatively favorable for Mr Kuroda and yen depreciation should also help push up the price of imported goods, he will need to exert all the tools at his disposal. To us, merely buying more JGB is unlikely to meet the requirement. In our view, purchases of other assets such as equity, J-REIT and even commodity indexed assets are essential. 


Fiscal policy also needs to be kept loose in 2014-15

Mr. Kuroda also needs to persuade the government to delay the planned fiscal tightening in 2014-2015. Japanese government has pledged internationally to significantly reduce its fiscal deficit by 2015, but such fiscal tightening will be a major obstacle for Mr. Kuroda to achieve his reflation objective. A delay in consumption tax rate hike, currently scheduled for April 2014, is ideal, but if that is politically difficult, the government may need to ease its fiscal policy elsewhere in order to offset its negative economic impact. Can Mr. Kuroda persuade his old pals at the Ministry of Finance to refrain from tightening fiscal policy too much? While we hope he can, it is more likely that the hard headed conservatives inside the Ministry of Finance who wants tighter fiscal policy will prove to be too strong a foe for Mr. Kuroda.