CPI fell 'only' 0.1% in December 2012. Should the BoJ feel proud?

Jan. 25, 2013, 17:00 JST



In the last 12 months, CPI has been falling 'only' by 0.1% year on year on average. Should the BoJ feel proud? We do not think so. As the BoJ often points out itself, 'Price stability' should be achieved on medium terms. On this measure, the BoJ has a very poor record. CPI fell by 1.8% points totally in the last 4 years. Deflation may not be so bad if wages were rising, but average wages in Japan fell by 3.2% in the same time. Was the deflation unavoidable amidst the global recession? In U.S., both prices and wages rose by 7% during the same 4 years. Judging by the recent policy statement and Governor Shirakawa’s comment, the BoJ’s attitude toward 2% inflation target seem half-hearted at best. Unless PM Abe appoints an extraordinary leadership to govern the BoJ, Japan is likely to continue to be mired in deflation for some years to come.


CPI fell 'only' 0.1% in December 2012. Should the BoJ feel proud?

These days, BoJ governor Shirakawa sounds almost proud when he talks about the recent trend in CPI inflation. In a speech he made on Nov. 26, 2012, he said “the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is expected to remain at around 0 % for the time being and start rising gradually thereafter as the supply and demand balance improves in accordance with a pick-up in economic activity.”. It almost sounds as if BoJ is doing a good job now that there is virtually no deflation.

Let’s see how the figures stand up to what Governor Shirakawa is saying. Indeed, in the measure referred to in his speech, CPI excluding fresh food, the year on year (YoY) inflation has been close to zero in the last 12 months. When we look at the core measure, CPI excluding food and energy (core CPI), the deflationary pressure in the measure seems somewhat severer. On average, core CPI has been falling at the rate of -0.6% YoY in 2012. But then, the deflation is certainly less severe than in 2010, when the core measure was falling at the rate of 1.2% YoY. So a job well done, Governor Shirakawa?


Deflation has been slowly easing in the last 2 years




Such impression on the BoJ’s performance fades away when we change the way CPI is expressed. Here is what you see if you decide to observe price levels, rather than YoY changes.  


What does this chart tell you about BoJ’s performance?




It is almost as if BoJ has been targeting negative inflation

As the BoJ often points out itself, a central bank should aim to achieve 'price stability in the medium term', not just in a single year. Well, when you see this chart above, you may think that the BoJ has been targeting negative inflation. Core CPI has fallen by 5% in the last 8 years, on average 0.6% per year. 


Some still argue that consumers like falling prices

Governor Shirakawa often points out the result of BoJ surveys where 85% of those polled answer that they do not like inflation. Sure, who does want to pay higher prices for their purchases? But it is easy to realize that the price paid is sales earned for the sellers. When your sales keep declining, what would happen to your wage? Here is what happened to the average wages in Japan. Since 2005, the average wages in Japan fell by 5% while CPI has fallen by 1%, in other words, real wages have fallen by 4% in the last 7 years.  


Wages have fallen much faster than CPI



With the global recession, you may think it was unavoidable? Let’s see how the U.S. FED did across the pacific. 


Except for the blip in 2009, wages and prices have been rising consistently in US

Source: BLS, CEIC, JMA


Deflation likely to persist in Japan

In our view, just because CPI inflation in Japan has been close to zero in the last 12 months, there is nothing the BoJ should be proud of. If the BoJ is serious about aiming for 'price stability in the medium term', it needs to compensate for its failure to achieve the stability in the past. Will it do so? Reading the BoJ’s recent policy statement on January 22 and hearing Governor Shirakwa’s comments in the followingpress conference, we must say it is rather unlikely. In our view, unless PM Abe succeeds in installing a team of extraordinary deflation fighters as Governors at BoJ, Japan is more likely to be mired in deflation for some years to come.