Japan's May Consumer Price Index "Stable" (=Did Not Fall), Stock Market Cheers; CPI May Turn Positive in June as Price Pressure from Energy and Food Rise

As the PKO (price-keeping operation) seems to continue on Nikkei Index futures, as Nikkei Shinbun writes "the orders just don't stop", the Japanese stock market is also cheering the consumer "price stability" achieved in May for the first time in seven months.

It makes your head spin, as "price stability" in this case means "price did not go down" in May. As far as Prime Minister Shinzo Abe and Bank of Japan's Kuroda are concerned, it is of course not enough but a good start; for them, "price stability" means 2% inflation every single year.

From New York Times' Hiroko Tabuchi's article (6/27/2013):

TOKYO — In the latest sign that Japan may be inching out of its deflationary slump, data on Friday showed that core consumer prices were flat in May compared with the previous year, though lackluster household spending signaled that the recovery still needed time to take hold in the wider economy.

It was the first time in seven months that Japan’s core consumer price index, which excludes volatile fresh food prices but includes energy, did not fall. The results were largely in line with economists’ expectations. In April, prices fell an annual 0.4 percent.

... Japanese consumers have been the most wary of Mr. Abe’s recovery pitch. Separate government data released Friday showed that household spending fell 1.6 percent in May from a year earlier, dashing economists’ expectations of a 1.3 percent rise. A shortfall in consumer demand has been the biggest contributor to Japan’s deflationary woes.

And Japan’s so-called core-core consumer price index, which excludes both food and energy, fell 0.4 percent in the year to May, after a 0.6 percent annual decline in April, underscoring continued weak consumer demand.

Still, early data for consumer prices in Tokyo, seen as a precursor of nationwide trends, rose 0.2 percent in June, signaling that a turnaround could be near.

(Full article at the link)

It does make my head spin. A turnaround for whom? I guess for Abe and Kuroda, but not for households and businesses who have to deal with fast-rising input costs.

According to Nikkei Shinbun, the biggest contributor to "price stability" in May was 8.8% rise in utility bills. Prices of non-perishable food items are set to rise, as manufacturers are passing higher input costs to consumers. The higher input costs have been brought on by Abe, Aso and Kuroda's talking down of Japanese yen over the past 6 months.

Yasunari Ueno, chief economist of Mizuho Securities, said in his May interview with the UK's Financial Times:

Yes, in March we saw -0.5% for core CPI YoY basis. In April it will be -0.2 to -0.3%, in May it will be around flat [unchanged]. In June we are going to see 0.2 to 0.3% positive core CPI number. It will be a little shock to the JGB market. When we see the energy market movement, I confidently forecast the positive change for CPI core. However, this is kind of a supply side shock, not pulled up by demand side, stronger internal demand.

He also said,

And if we see a higher consumption indices, then we need higher pay rise. About 5 to 6% strong wage hike is needed, however this year we are going to see about 1.8 or 1.9%. So there is a huge gap between them.

His remarks were hardly heeded in Japan, as Ueno spoke in English to an English media. I have noticed that Bloomberg Japan and Wall Street Journal Japan both modify their Japanese articles to make them less edgy and less controversial compared to their English articles, particularly when they interview Japan-based economists and analysts whose views are very sharp and critical. Reuters Japan, on the other hand, features such economists and analysts and write up articles detailing their views and opinions.

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To Deflationists: Don't Cite Japan as America's Future

Japan may have no choice, with dwindling population.

There is a battle going on, increasingly on the blogsphere, between so-called deflationists and so-called inflationists. Most of them talk about price inflation/deflation, while others talk strictly about monetary inflation/deflation. Some switch between the two to fit their argument of the moment.

One of the arguments by so-called deflationists is Japan. Look at Japan, they've been doing for two full decades what the U.S. has started to do (QE, near-zero interest rate to help big banks repair their battered balance sheet, etc.) and what have they got? Price deflation!

It doesn't quite matter to them that price deflation in Japan (called "price destruction" in Japan) has never been more than 2% on the annual basis.

The new Japanese administration, just like the old one and just like the new one in the U.S., is frantically trying to re-inflate, calling deflation "unacceptable". But Japan, compared to the U.S., has one fatal (I think) disadvantage in their misguided effort to re-inflate: Population decline.

Population in Japan decreased for the 3rd straight year
(1/1/2010 Yomiuri Shinbun; original is in Japanese)

"According to the estimate by the Ministry of Health, Labor and Welfare, the number of deaths in Japan in 2009 exceeded the number of births by 75,000, making it a third straight year of population decline.

"The difference of 75,000 is the largest since the end of World War II.

"In 2009, there were 1,144,000 deaths (increase of 2,000 from previous year) and 1,069,000 births (decrease of 22,000 from previous year). Japan's population started to decrease in 2005 for the first time since the end of World War II.

"The Ministry officials believe the pace of population decline will accelerate further."

With ever-decreasing population, demands for goods and services naturally decline. What could the providers of goods and services do, other than to lower the prices to entice the dwindling number of buyers?

I wouldn't be surprised if Prime Minister Hatoyama tried to spin this population decline as a "wave of the future" for a sustainable, greener world.

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