Pause in Yen Fall Fuels Debate Over Japan Inflation

Japans inflation, as measured by consumer prices, is rising steadily about a year after a policy shift by the Bank of Japan yet few economists believe it will reach the banks inflation target by the mid-2015 deadline.

One reason is their different understanding of what the yens recent stability means to the price outlook.

Core consumer prices are getting closer to the central banks 2% target. Data Friday showed they rose 1.3% in January from a year earlier, the eighth straight month theyve risen. The core gauge tracks a basket of goods and services but excludes fresh food, whose costs are volatile.

But economists arent so impressed by the data. Roughly half of the current inflation in consumer products is due to the dramatic drop in the yen from late 2012 to mid-2013, they say. That has sharply inflated the costs of imports, which have partly been passed on to consumers.

Significantly, core CPI does include energy, where the yen effect has been particularly acute. According to the BOJs import price data, the costs of liquid natural gas now a main resource in Japan for generating power were 17% higher in January in yen terms.

The Japanese also saw sharp rises in prices of foreign-made home electronics, which they increasingly import: Prices of washing machines were up 13%, while prices of audio equipment and refrigerators both rose 16%.

Barring another major drop in the yen, however, those exchange-rate effects will start to fade from this spring. Friday morning, the yen was trading around Y102 to the U.S. dollar about the same level it was last May.

Core prices will peak out by March, said Toshihiro Nagahama, chief economist at Dai-ichi Life Research Institute. Core CPI will then fall over the summer, he said, ultimately reaching 0.7%-0.8% by September.

BOJ officials see things differently. They expect core inflation to stay around 1.3% until summer and then pick up pace as a stronger domestic economy creates new inflationary pressures to offset the fading currency effect.

As evidence of improved domestic demand, BOJ officials point to core-core consumer prices, which exclude food and energy. They rose 0.7% in both December and January, their highest level since 1998.

Originally posted here:
Pause in Yen Fall Fuels Debate Over Japan Inflation