Chart of the Week: Japan inflation at 40-year high

Consumer price inflation in Japan rose from 4% year-on-year in December to 4.3% in January. The last time inflation levels were this high was more than 40 years ago. The rise is due to large increases in energy costs and raw materials, among other factors. Real wages fell in 2022 so to support consumers facing high inflation, especially on food prices, the Japanese government is subsidising electricity and gas bills. Despite inflation running well above its target, the policy rate in Japan remains negative. Market expectations had been betting that the Bank of Japan would increase rates to curb inflation, but the central bank is sticking to its yield-curve control policy. The BoJ faces a difficult trade-off between implementing monetary easing to support the population, implicitly accepting a weaker yen and increasing import costs, and the need to curb inflation. The bank’s expected next governor, Kazuo Ueda, has stated that he would maintain loose monetary policy to support economic activity, albeit admitting that it will take time for inflation to fall to the target of 2%. A regime of positive inflation in Japan is not necessarily bad news after decades of disinflationary forces.

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