Japan’s Slowing Consumer Inflation Piles Pressure on BOJ

TOKYO (Reuters) – Japan’s annual core consumer inflation slowed in November, reinforcing market expectations the central bank will hold off on whittling down stimulus for a prolonged period as prices remain distant from its target.

A woman holds a shopping bag as she waits at a pedestrian crossing in the Ginza district in Tokyo, Japan, March 24, 2016. REUTERS/Thomas Peter

The data drew attention to Bank of Japan Governor Haruhiko Kuroda’s warning on Thursday that rising economic risks will keep the central bank open to the idea of boosting – not trimming – stimulus.

The nationwide core consumer price index (CPI), which excludes the effect of volatile fresh food costs, rose 0.9 percent year-on-year in November, government data showed on Friday. That was below a 1.0 percent gain in October and off market forecasts for a 1.0 percent increase.


“Falling oil prices will likely weigh heavily on inflation,” particularly around spring next year when the drop in fuel costs push down electricity and gas bills, said Takeshi Minami, chief economist at Norinchukin Research Institute.

“As achievement of the price target becomes elusive, the BOJ could be forced to respond if downside risks to the economy heighten,” he said.

In a sign soft household spending is weighing on inflation, the rise in so-called core-core CPI, which strips away the effect of both fresh food and energy costs, slowed to 0.3 percent in November from 0.4 percent in the previous month.

The weakness in the core-core price gauge will be particularly worrying for the BOJ, which focuses on the index for clues on whether strengthening economic growth is changing companies’ price-setting behavior.

Marcel Thieliant, senior Japan economist at Capital Economics, said the slowdown in core-core inflation was a “big disappointment” and could persist as producer prices of consumer goods stopped rising altogether in November.

“The risks to our forecast that inflation climbs to 0.7 percent by the time of next year’s sales tax hike are increasingly tilted to the downside.”

Stubbornly soft inflation has dashed the BOJ’s hopes a solid economic recovery would translate into higher prices, forcing it to maintain its huge stimulus despite unwelcome side-effects such as the erosion of financial institutions’ profits from years of near-zero interest rates.

US trade delegation leaves hotel ahead of second day of talks in Beijing

Adding to the headache for policymakers, Japan’s economic growth contracted in July-September and is expected to rebound only modestly on darkening prospects for exports.

The central bank maintained its ultra-easy policy at a rate review on Thursday, lagging further behind the U.S. Federal Reserve in unwinding crisis-mode stimulus.

The International Monetary Fund has called on the BOJ to maintain its massive stimulus, arguing that the side-effects of prolonged easing are not enough to outweigh the benefits.

“The only game in town is achieving the target. Tightening now is not going to help you get there. They’re very much committed to reaching the target, and we think that’s the right thing to do,” said Paul Cashin, the IMF’s mission chief for Japan.

Reporting by Leika Kihara; Editing by Shri Navaratnam


Economic growth stands for the increased capacity of an economy to produce goods and services over a period of time[1]. This can be expressed as GDP or GNP. Economic growth has a ripple effect, thereby having far reaching impact on growth of businesses, investment, consumption and employment opportunities in the country. Hence to keep the country in the positive growth trajectory it is important that the economy provides an environment suited for increased production of goods and services.

Inflation refers to a continuous fall of the value of money or a sustained increase in the general price level[2]. Japan registered a decrease in inflation i.e. , a deflation in the month of November. In October, though the core Consumer Price Index showed an increase of 1% , in November it was reduced to 0.9%. The CPI measures the rate of change of prices of goods and services, either monthly or quarterly by collecting information directly from the retail outlets or shops and calculating the average prices[3]. The fall in household spending is one of the main factors behind the deflation in November. A rise in prices of the goods and services – the probability of which is low in the current scenario- is required to revive the economy. The deflation is predicted to rise since the drop in oil price will further reduce the gas bills and electricity bills in the country. The circular flow of income shows us that households should spend money in the economy and provide labour and capital for economic growth which is then reciprocated by producers who deliver the goods and services. Due to this interdependence, the low cost of products would yield comparatively lower profits to producers making retention of large number of employees unsustainable. The reduced paying capacity of the consumers reduces the investment in the economy, slowing down growth and GDP. GDP is the monetary value of sum total of goods and services produced in a country and purchased by the consumer within a fixed period of time[4].

Japan’s Slowing Consumer Inflation Piles Pressure on BOJ

GDP can be measured through the expenditure approach as Y= C+I+G+X-M, where C represents the expenditure on final household consumption in the country, thus illustrating how an increase in C would consequently increase the GDP.

Japan’s Slowing Consumer Inflation Piles Pressure on BOJ

Price level                                                           Long run Aggregate Supply

Japan’s Slowing Consumer Inflation Piles Pressure on BOJ
Japan’s Slowing Consumer Inflation Piles Pressure on BOJ
Japan’s Slowing Consumer Inflation Piles Pressure on BOJ
Japan’s Slowing Consumer Inflation Piles Pressure on BOJ
Japan’s Slowing Consumer Inflation Piles Pressure on BOJ


Japan’s Slowing Consumer Inflation Piles Pressure on BOJ


                                                                                               AD 1

                                                                                                AD 2

       0                                          Y2        Y1                                          Real GDP (Y)     

In the graph when the prices decrease, there is decrease in AD and decrease in real GDP, causing deflation. In Japan the BOJ is said to be waiting for private businesses to increase their prices so that it can roll back its stimulus as increase in price of goods and services will generate more profits for them, thereby enabling them to employ more people.

Though the government policy is to regulate inflation it is generally the Central Bank of the country which is entrusted with this responsibility[5]. The BOJ primarily relies on the Core Consumer Price Index to observe whether the companies have changed their prices in response to an inflation or deflation. To counter the ongoing deflation so that the GDP continues to rise, the Bank of Japan is already pumping money into the economy by selling its bonds and other measures thereby neutralizing years of profits to keep the economy in the growth trajectory. In the absence of rise in prices and inflation and the predicted deflation for the near future, the BOJ is forced to continue to keep investing funds in the economy to aid in its growth.

Keynesian economics asserts that the government can contribute to restoring the aggregate demand of the market through fiscal and monetary policies intended to revive the economy. In this the aggregate demand is measured as the overall spending of the government, businesses and households[6].  According to Keynes when the aggregate demand (AD) increases through increasing spending or consumption in the economy, it increases the overall output of the economy leading to economic growth.

Japan’s Slowing Consumer Inflation Piles Pressure on BOJ
Japan’s Slowing Consumer Inflation Piles Pressure on BOJ
Japan’s Slowing Consumer Inflation Piles Pressure on BOJ

PRICE LEVEL                                                                                LRAS

Japan’s Slowing Consumer Inflation Piles Pressure on BOJ
Japan’s Slowing Consumer Inflation Piles Pressure on BOJ


Japan’s Slowing Consumer Inflation Piles Pressure on BOJ
Japan’s Slowing Consumer Inflation Piles Pressure on BOJ

P1                                                                                                                                  AD 2


                                                                   Y1               Y2                                                  REAL GDP (Y)

The relationship between AD and inflation as described in the Keynesian theory is the same as that mentioned in the article. The main concern as deflation persists is that the central bank has to infuse money into the economy to protect it from threat of further deflation. The article also shows how this reduced AD will have an inevitable adverse impact on the exports of the country further hampering economic growth at the time of deflation. The focus of the government should be on addressing the short term concerns of the economy such as unemployment and reduced purchasing power of the people rather than solely thinking for long term solutions as the solutions to short term issues ensures sustained economic growth[7]. If the current realities were to continue then Japan may face difficulty in maintaining its economic growth as all signs show that a drop in prices is inevitable in light of reduced oil prices and exports.

If policy changes are not made, then deflation is more likely to persist. Since it is understood that deflation will get worse in the near future, it is prudent to take preemptive steps and policy changes.

[1] Investopedia https://www.investopedia.com/terms/e/economicgrowth.asp

[2] Labonte, Marc(2011) Inflation: Causes, costs and current status Congressional Research Service 7-7500 https://pdfs.semanticscholar.org/48ac/7bf4dd4a6c9bce7c05722506274307bba096.pdf

[3] Consumer Price Index manual (2004) ILO, IMF, OECD, Eurostat, UN and World Bank Page: 17 https://www.ilo.org/wcmsp5/groups/public/—dgreports/—stat/documents/presentation/wcms_331153.pdf

[4] Callen, Tim (2008) What is Gross Domestic Product Finance and Development Page: 48 https://www.rrojasdatabank.info/imfongdp.pdf

[5] Consumer Price Index manual (2004) ILO, IMF, OECD, Eurostat, UN and World Bank Page: 66 https://www.ilo.org/wcmsp5/groups/public/—dgreports/—stat/documents/presentation/wcms_331153.pdf

[6] Jahan, Sarwat; Mahmud, Ahmad Saber and Papageorgiou, Chris (2014) What is Keynesian Economics?  Finance and Development –International Monetary Fund Page: 53 https://www.imf.org/external/pubs/ft/fandd/2014/09/pdf/basics.pdf

[7] Jahan, Sarwat; Mahmud, Ahmad Saber and Papageorgiou, Chris (2014) What is Keynesian Economics?  Finance and Development –International Monetary Fund Page: 54 https://www.imf.org/external/pubs/ft/fandd/2014/09/pdf/basics.pdf

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