Japan’s food inflation is becoming harder for Bank of Japan to overlook
After three years of rising costs of living, the economy is finally emerging from its long-held deflationary mindset, and trends in food prices could convince consumers that inflation is here to stay
FOOD inflation in Japan is a hot topic for households managing monthly budgets – and increasingly for the central bank as well, as prices for staples including rice and cabbage soar.
The issue will gain fresh traction with Friday’s (Feb 21) release of consumer inflation data forecast to show overall price gains picking up to 4 per cent in January from 3.6 per cent in December, according to consensus. That may boost pressure on the Bank of Japan (BOJ) to hike its benchmark rate at a faster pace than previously expected.
Cabbage prices at 2.6 times their five-year average are a particular problem for people such as Katsumi Shinagawa, who manages a pork cutlet restaurant in Tokyo. Restaurants such as his typically offer cabbage as an all-you-can-eat side dish served alongside the tonkatsu cutlets.
Nowadays, some people fill their stomachs with large servings of the vegetable before they tackle the main dish, Shinagawa said. The costs hurt, but he said he will be patient as long as customers continue to flow in. At the same time, he sometimes wonders which is now the side dish, as the price of cabbage has risen to almost the same level as pork.
“It’s like pork and cabbage are competing with each other,” Shinagawa said. “I never in my life imagined this would happen.”
The 4 per cent figure would reaffirm Japan’s status as the Group of Seven country facing the fastest inflation, contrasting sharply with its decades-long reputation as a nation stuck in a deflationary rut. The gauge that removes fresh food is expected to show price growth of only 3.1 per cent, widening the gap between the overall data and the core figure to the most since 2016.
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Central banks tend to focus on the core figure as a guide to policy in part because food prices affected by everything from the weather to labour shortages are hard to address via interest rates. Also, those trends are often temporary.
Still, BOJ governor Kazuo Ueda seems to be paying closer attention to food. He said last week he will keep food inflation in mind when conducting monetary policy, as it may not be temporary and could affect consumers’ inflation expectations.
The level of fresh food prices has risen 71.9 per cent since 2010, about five times more than that of inflation excluding it. The price of rice rose 90 per cent from a year earlier in the week through Feb 9, the agriculture ministry reported on Tuesday.
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A recent report by the Cabinet Office also caught the eyes of some BOJ watchers. It pointed to the growing importance of watching inflation data that includes fresh food. Former BOJ chief economist Hideo Hayakawa said that’s interesting given the BOJ has used a gauge excluding fresh food – core consumer price index (CPI) – as its key inflation gauge in its quarterly outlook report, although it also said it monitors a wide range of indicators to discern the price trend.
“The Cabinet Office is taking note that fresh food prices are rising continuously,” Hayakawa said. “If fresh food is increasing as a trend, it could be fine to have core CPI rising below 2 per cent,” putting overall inflation around 2 per cent, he said.
It’s also of keen interest to the government. Prime Minister Shigeru Ishiba’s predecessor Fumio Kishida was partly pushed out of office due to growing discontent over inflation, including the cost of food. Ishiba faces the prospect of a national election by the end of July. His ruling party sustained its worst election result since 2009 in October polls, an outcome that analysts attributed greatly to inflation.
“I do not know if the BOJ has a very long time to wait and see,” said Daisuke Karakama, chief market economist at Mizuho Bank, who expects the next hike to be in April as his base case. “Japan’s inflation is the highest among the G-7, yet the policy rate is just 0.5 per cent. The BOJ has not done enough.”
Traders sent bond yields to the highest level since 2009 on Thursday on bets that the BOJ’s terminal rate in the current tightening cycle may be higher, or hikes make come faster, than previously expected.
After three years of rising costs of living, the economy is finally emerging from its long-held deflationary mindset, and trends in food prices could convince consumers that inflation is here to stay. BLOOMBERG
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