Econintersect: On the surface it would seem that Japan is well on its way to higher inflation. Core inflation was reported for June to be 2.3% for the past year, and up 3.6% including perishables and energy. This was the third month in a row that the overall inflation rate was 3.4% or higher. These numbers are well above the 2% target of the Bank of Japan and at levels last seen in Japan 23 years ago. But the nominal numbers are not at all what they might seem.
The following graph from Trading Economics shows the apparently astonishing spike of CPI (Consumer Price Index) for Japan in the most recent three months to levels not seen since late 1991.
The following graph shows the CPI numbers for the past 12 months and gives some meaningful insight into what is going on.
We see that the April CPI marked a jump of 1.8% (and May 2.1%) from the March reading. The only problem with this is that the jump actually indicates a decline in inflation to a rate less than 1% year-over-year (or less, see discussion below). This is because the Japanese consumption tax jumped from 5% in March to 8% in on April 1. If this fed through exactly to prices paid by consumers then the last three readings would effectively be 0.4% (April), 0.7% (May) and 0.6% (June), with the extra 3% not going to the real economy but into the Japanese government Treasury.
Marcel Thieliant, a Singapore-based economist at Capital Economics, was quoted byBloomberg:
“The data suggest that firms have now mostly passed on the higher sales tax, and inflationary pressure has started to diminish. Â Underlying inflation will fall below 1 percent in coming months.”
But is it already below zero (return to deflation)? The assumption is that most of the 3% consumption tax hike could pass through to consumer prices. But it could be higher. Because the tax acts much like a value added tax it is imposed at every level of production on the output. Last year a GEI News article estimated that the old 5% tax actually removed up to 7.4% of the final consumer price as accumulated taxes. The increase to 8% could actually add up to an additional 1.5% in accumulated taxes above the nominal 3%.
