(Bloomberg Opinion) -- Bloomberg Opinion has been chronicling inflation's journey — from being too low for many policy makers’ comfort before Covid to being the new public enemy No. 1. In the U.S., inflation accelerated to 8.5% in March. It’s also on the rise in Japan, though hasn't quite reached those elevated levels. The country is contending with a weakened yen, which is both a byproduct of higher inflation and something that exacerbates the situation.
Columnist Daniel Moss is joined by Bloomberg News senior editor Gearoid Reidy and economy reporter Yuko Takeo, both based in Tokyo, to discuss what factors contributed to inflation in Japan. This is an edited transcript of their conversation.
Daniel Moss: You wrote recently that fried chicken from convenience stores tells a powerful story about inflation in Japan. Why is that example so important?
Gearoid Reidy: Lawson raising the price of a fried chicken treat by 10% was significant because it was the first hike in the product's 36-year history. It shows how unusual some of the price hikes we're seeing right now in Japan are. I've been here for close to 20 years now, and I see what economists tend to refer to as a deflationary mindset: The idea that prices are not going to rise is very heavily instilled in consumers. Because of that, companies will tend to prefer not to raise prices unless they absolutely have to because consumers are very easily scared off. Companies are accustomed to squeezing their own margins first to cut costs before they raise prices. You’re seeing a lot of companies bite the bullet and decide they can't cut costs any further and they're having to raise prices on all kinds of things: ice cream, beer, all types of staples.
Moss: Is inflation giving the Japanese a psychological jolt?
Yuko Takeo: We've had deflation for so long, prices haven't moved basically for three decades. Even this small rise, and especially the rise in fuel costs, is having an effect on people's mindsets — especially people who commute for work.
Moss: Japan has wanted inflation for a long time. Why not just accept this gift?
Reidy: There are two things to consider here. Number one: From the perspective of some policy makers and probably the Bank of Japan, they are content to have a little bit of inflation. It’s one reason the BOJ is reluctant to change policy at the moment. The second thing you have to mention is there’s an election coming up in the summer — an upper house election that Prime Minister Fumio Kishida has to fight. The last thing he wants is discontent from voters.
Moss: How much are inflation and the cost of living on the mind of Japanese voters as they prepare to cast ballots in this upcoming election?
Takeo: This will probably be quite an important point coming up to the summer elections, and the series of measures that Kishida announced is very aware of that fact. More than 6 trillion yen ($45.9 billion) is directly aimed at voters who are thinking about the rising costs of fuel, food prices and other goods.
Moss: Why not just raise interest rates? Interest rates are going up pretty much everywhere around the world.
Takeo: The tricky situation the BOJ faces is that inflation in Japan isn’t as bad as it is in the U.S. or elsewhere. It hasn’t hit that 2% inflation rate that the BOJ has been targeting for so long. If the BOJ decides to raise rates before that 2% target is reached stably, it will be going against its own policy.
Moss: One of the superlatives Bloomberg News has used in its reporting is that the yen is on the biggest continuous slide in 50 years. Is it really that bad?
Takeo: It is fairly dramatic. Over the past six weeks, it's gone from something like 115 yen to the dollar to now more than 130. Officials have been very conscious of the speed of the yen weakening. This also ties into the pains of inflation because if the yen is weaker, it would cost more to import things. It costs more to import fuel, it costs more to import various other goods. The sudden weakening of the yen contributes to the pains of inflation in Japan.
Moss: Who is to blame for the inflation in Japan?
Reidy: There’s a combination of factors. The Covid-19 pandemic does weigh on it, but not in the way it would weigh on inflation elsewhere. Japan had quite a different experience during the pandemic than many other countries in the West. We haven't seen rising labor inputs contributing to inflation so much here. It is very much down to import costs. Energy costs are a huge factor. The war in Ukraine has increased energy prices further and the price of wheat and all kinds of commodities.
Moss: What is happening with wages?
Takeo: So far, we're not seeing a huge amount of wage hikes in Japan. The Shunto wage negotiations that happen every spring — we did see a bit more this year in terms of unions’ requests for wage hikes being accepted by larger companies. It's not widespread enough to catch up with the weaker yen and the increasing amount of inflation we're starting to see in Japan. It really is key whether the government is able to bring in policies to push the rise in wages together with inflation.
Moss: Should Bank of Japan Governor Haruhiko Kuroda be taken at face value when he insists there will be no change to the country's monetary policy?
Takeo: Governor Kuroda certainly has surprised markets and journalists many times over his tenure at the Bank of Japan, which started in 2013. It wouldn't be entirely out of character for him to suddenly change course and surprise us right before he retires in April 2023. It is a space we are watching closely to see if Governor Kuroda actually means what he's saying or if he will be pushed to reconsider inflation and admit that this isn't temporary — that this may be going on for longer than the Bank of Japan is seeing at the moment.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Gearoid Reidy is a Bloomberg News senior editor covering Japan. He previously led the breaking news team in North Asia and was the Tokyo deputy bureau chief.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
©2022 Bloomberg L.P.