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BOJ and Inflation

Screen Shot 2013-04-29 at 12.12.58 AM

Inflation (dark) and Wages (light)

The BOJ recently released its biannual inflation outlook (経済・物価情勢の展望: 2013年4月). The graph at right shows inflation (dark) and hourly wages; while the latter are up slightly, such metrics are volatile and affect inflation with a lag. But wages are central: they are the largest cost for most businesses, and until they rise, well, there won’t (can’t!) be inflation.

Prospects for that however depend on growth, because the baby boomers (団塊世帯) are in no hurry to retire. [The Somushō report noted in Yomiuri (2013.04.27: 働くシニア1192万人 6年連続最多更新) however looks at absolute numbers, not propensity to work – and the absolute numbers reflect the baby boom.]

Return on Assets (dark) and Interest Rates (light)

I’m skeptical that the BOJ can change this. First, growth of the money stock hasn’t been sluggish; if monetary policy is going to do anything, it should have had an impact a decade ago. I mean, if companies don’t want to borrow at 1% pa, would an interest rate of 0.9% make any difference? We’re really looking at marginal changes.Screen Shot 2013-04-29 at 12.25.27 AM

Then there’s excess capacity. Now there’s no direct measure of gaps between actual and potential; they have to rely upon either a model of how inputs are related to output, or to a trend-based projection, both of which have defects (and, of course, they don’t give the same bottom line, else it would be irrelevant to mention. See a BOJ study of the issue.) By the BOJ’s own calculations this gap remains large. Until it’s eliminated, my belief is that wages will not rise enough to force firms to raise prices (and without higher wages, where will demand come from?).

Now if the government were engaged in fiscal stimulus, I’d be less skeptical. To my knowledge, however, Abe has not forsworn the increase in the consumption tax in 2014. WIll the weak yen help? Maybe, but Japan just isn’t that dependent on exports. Meanwhile, Europe threatens to drag down everyone: from a Japanese perspective the drop in incomes in an important export market will more than offset any benefits from a weaker yen.

mike smitka

washington and lee university


Potential GDP Gap



  1. rbkatz2013 says:

    Entering a comment as a test. I noticed a great deal of skepticism about the BOJ being able to meet its goals.

    For example, from the Nikkei of 4-27:

    BOJ Price Outlook Greeted With Skepticism In Market

    The April 2013 edition of the semiannual report forecasts that the consumer price index will grow 1.4% for fiscal 2014, excluding the effects of a consumption tax hike. But market economists’ own projections average
    just 0.5% or so….

    “Economic forecasts presented by policymaking bodies are based on their own policy programs and do not necessarily match up with market projections,” BOJ Governor Haruhiko Kuroda argues.

    But market observers are not buying the disparity.

    “The outlook report has become a propaganda tool designed to firm up inflation expectations,” contends Yasunari Ueno of Mizuho Securities Co.

    OK. I see a problem. How do I paste as a quotation? And scrolling down within a message is not easy; Finally used the up and down arrows

    Richard Katz

    • Yeh, this particular “theme” is not ideal, I can set up a “blockquote” and all that but not without laying out $30. If enough people migrate to this, I’ll do it. Not worth raising funds for such a piddling amount.

    • Rick, I’ll work up a how-to guideline – but not this week. Class in less than one hour…a retired senior Ford exec en route to speak tomorrow/Thur, in Detroit with students next week. mike

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