You know we're hitting peak inflation when they're even worried about it in Japan.
The Bank of Japan is now eyeing potential inflation that soon could head toward its official 2% target. A "summary of opinions" that Japan's central bank put out today from its January meeting shows that policymakers believe inflation may rise close to 2% from April onward.
"In such a case, it will become important to analyze what lies behind this inflation and whether it turns out to be sustainable," the BOJ states. For the first six months of this year,
the consumer price index in the world's third-largest economy could increase around 1.5%.
Japan is not there yet. Indeed, Japan has been desperate to provoke 2% inflation ever since the government and the central bank set it a 2% inflation target way back in 2013.
It would take wage and household income gains to maintain a steady rate of inflation around the 2% target, the central bank believes.
Energy prices and higher costs for shipping, parts and raw commodities are driving Japan's consumer price index higher. But so, too, is shock behavior from some Japanese companies, which have - wait for it - taken the drastic action of raising prices.
Raising price has been almost unheard-of behavior ever since a post-bubble Japan began encountering deflation. The benchmark Nikkei 225 index ran up massively in the late 1980s only to crash by half in 1990. By 1995, deflation had set in, with prices down 0.13% that year. They've generally been at or below par ever since then, except for a 1.4% leap due to Lehman-era stimulus in 2008 that was reset by 1.4% deflation in 2009, and also in 2014, when the sales tax rose from 5% to 8%, only to cause consumer sales to crash.
Right now, the BOJ notes that some companies may accept lower margins and absorb higher costs because they're worried sales will take a hit if they hike their price tags. But those concerns are evened out by companies that want to pass through their higher costs to consumers, inspired in part by strong consumer confidence.
"Risks to prices are generally balanced," the BOJ states. Prices in services are particularly stubborn to budge, so it's the cost of physical goods that is most likely to rise.
Reuters ran a quirky story two weeks ago noting that makers of premium telescopes, high-end violin bows and specialty paper have hiked their sticker prices. Vixen Co., which corners 60% of the market for astronomy gear, plans to lift the cost of lower-end telescope models as much as 24%.
When it comes to staples such as food, however, manufacturers really resist any change. One think tank, the Food Marketing Research and Information Center, says food suppliers only hike prices when the cost of raw materials jumps 20% to 30%. Unless the situation becomes that dramatic, food companies resort to "shrinkflation," offsetting costs by making their products smaller.
Other Japanese companies concentrate on what they dub euphemistically "corporate efforts." That means cutting costs or streamlining operations.
There are other factors driving up prices. With interest rates looking set to rise in other developed nations, the Japanese yen is on a weakening trend. That drives the cost of any imported goods or parts up.
Meanwhile, the Japanese stock market is down so far in 2022, but outperforming U.S. stocks. The broad Topix index has sold off 6.8% so far this year compared with the 9.2% decline in the S&P 500 and the 14.5% descent of the Nasdaq composite. The Tokyo market is up only 1.7% from where it started last year.
If wages and the cost of services rise in synchrony, the BOJ may become convinced that the CPI increases are the real deal. The BOJ has its own euphemism for consumer behavior, watching for an "adaptive formation mechanism," meaning people expect prices to rise and pay up.
The BOJ broke ground in January 2016 by setting interest rates at negative levels - unthinkable, crazy even, at the time. Of course, it since has become the norm across many institutions seeking an easy method of stimulating pandemic-stricken economies.
The BOJ will also likely persist with negative inflation rates longer than just about any other central bank. The policy setters at the January meeting still insist that there's no need to rechart its current monetary course.
It's not easy to retrain companies and consumers after 27 years of coaching that prices generally go down. Deflation is uncommon to enter, and very, very difficult to counteract. It's disastrous for an economy as well, encouraging companies and individuals alike to put buying decisions off and thereby holding back overall activity.
"In order to achieve the price stability target of 2%, firms' and households' mindset regarding prices needs to change, and it is therefore important for the Bank to persistently continue with the current monetary policy," the BOJ concludes. That will be the case until the 2% price stability target is achieved "in a stable and sustainable manner," it adds. The BOJ said it "should communicate this policy intention to the public well to avoid misunderstanding."