Today, to much fanfare, the FT and other media blast that "Japan posts highest inflation rate since 2008" using this as evidence that Abenomics is once again working (i.e., that the Nikkei 225 has resumed its upward nominal path). Unfortunately, as usually happens, there is a problem here: this is simply not true.
The only reason why Japan posted its first positive CPI print in years has nothing to do with demand-pull broad "benign" inflation driven by rising wages, and everything to do with the "cost-push" of a plunging Yen forcing food and energy prices higher, something we predicted long ago would happen. In fact, when stripping away food and energy, core inflation was slightly weaker than expected with the first month-on month declines in both Tokyo and nationwide in the latest data in several months (seasonally adjusted). Which is to be expected: with incomes flat at best, in order to accommodate soaring food and energy prices the local population has to cut their spending for all other products, leading to deflation.
But what is most ironic is that economists in the US advise everyone to ignore soaring food and energy costs and to focus on the benign sub 2% annual rise in "other" hedonically-adjusted prices. However, when it comes to Japan, it is the opposite.
Ah, economists. As Seth Klarman observed:
"One day a physicist, a biologist, and an economist were sitting at a café across from an apparently empty building. They watch two people enter and then, later, three leave. The physicist says, "Apparently there was some error with our measurements," while the biologist says, "Obviously, they reproduced while in the building." Then the economist observes, "If another person were to enter the building, it would once again be empty."
SocGen has some more detail:
Japan’s June nationwide CPI as well as Tokyo’s July CPI turned positive even in year-on-year terms, following several months of sequential price rises. Headline nationwide CPI rose by 0.2% yoy, the first positive rate since May 2012 and ahead of expectations (median and SG 0.1%). Core nationwide CPI (ex fresh food) also showed positive growth of 0.4% yoy, up from zero in May and the strongest growth since November 2008 (median 0.3%, SG 0.6%). However, the narrower definition of core inflation – excluding food and energy – remained in negative territory at -0.2% yoy (after -0.4%), though it was still the strongest reading since January 2009 (median -0.3%, SG -0.1%). The gap between the two core rates of course reflects the importance of energy costs in driving inflation at this stage.
Oh well: time to change the definition of inflation then. The above visually for headline:
And the less pleasant, core:
SocGen goes on:
Headline inflation in Tokyo also turned positive in July to the tune of 0.4% yoy, from 0.0% yoy in June, and well ahead of expectations (median and SG 0.2%). This was the strongest since February 2009. Core Tokyo CPI (ex fresh food) also strengthened to 0.3% yoy from 0.2%,
continuing the run of positive annual rates that has been in place since May. However, the ex food and energy core measure was stable at -0.4%, which was weaker than expected (median -0.3%, SG -0.2%), and the result of the first monthly decline in this measure, of 0.1% mom (seasonally adjusted) in seven months. This was arguably the disappointing element in the report, along with a 0.1% mom decline in the same measure at the nationwide level.
Correct, so let's not talk about it, and let's certainly say that unlike in the US where food and energy costs are ignored, that people actually eat and drive (which means less money to spend on other things).
Finally, broken down by component:
At the component level, electricity prices rose by 9.8% yoy (nationwide) and gasoline prices rose by 6.4% yoy (nationwide) (15.4% yoy and 10.2% yoy respectively in Tokyo)... However, prices in a broad range of areas such as housing rent, recreation, furniture/household utensils and medical care still show price declines from a year ago.
So instead of a victory for Abenomics, one actually finds a complete defeat. But to understand that there is zero improvement in the one aspect that does matter to economic growth: rising wages and incomes, one actually has to move beyond the rose-colored headlines.
Ironically, there is a brief mention of the above in the FT article... in the final paragraph:
"Yasunari Ueno, chief markets economist at Mizuho Securities in Tokyo, said: “Deflation is unlikely to be overcome if the strategy relies simply on supply-side shocks to lift energy prices."
Shhh. Speak quietly or someone may hear you.