One of the major planks of Shinzo Abe’s election campaign was that his government would do whatever was needed to end deflation in the Japanese economy; a problem that has dogged the world’s third largest economy for the best part of twenty years. This was a key part of the strategy to end economic stagnation and generate renewed growth. So, on the face of it the fact that consumer prices have risen every month for the past five months must be good news.
Before we applaud Japan’s achievement to enthusiastically, we need to remember one of the consequences of the March 2011 tsunami. Although the nuclear accident at Fukushima was not a direct consequence of the tsunami, per se, it has resulted in a full shutdown of Japan’s nuclear generation capacity. Much of the capacity has been taken off-line for safety checks and routine maintenance, but public opinion in the aftermath of Fukushima is very hostile to nuclear power. Before the tsunami, nuclear power provided 30% of the nation’s electricity. This power shortfall has had to be met from conventional, fossil fuel, power plants, but that has meant that Japan has had to substantially increase fuel imports which are priced in Dollars. Given that the Yen has fallen by 25% or so (and continues to slide) against the Dollar in the past 12 months, it is unsurprising that Japan has been struggling with a rare series of negative balance of payment figures.
If fuel costs are stripped out of the 0.9% year-on-year increase in consumer prices (which also excludes food costs), then the actual increase is 0.3% year-on-year. This is not to be sneezed at since it still represents the biggest annual price hike seen in Japan for 15 years and serves to highlight the deflationary pressure that japan has endured for two decades. The Bank of Japan is targeting 2% inflation.
Abe’s government has made no secret of its desire to bring nuclear energy back on stream, but given current levels of popular opposition to such a move, fuel inflation is set to dominate the consumer price index for some time to come.