Japan’s CPI up, Yen down – energy prices to blame

As Japan tries to put over a decade’s worth of economic deflation behind them, the country experienced a spike in employment and the price of consumer goods – the largest increase in recent memory.  However, Japanese households are struggling to come up with the 0.7% annual Consumer Price Index (CPI) increase amid stagnate wages.

What’s driving consumer inflation?

Look no further than energy prices. The cost of electricity rose 10.1% compared to last month. Natural gas rose 5.2% and gasoline rose 10.5% - and those numbers are all up from the month before!

"It's further proof that the Japanese economy is solidly recovering," says Norio Miyagawa, a senior economist with Mizuho Securities Research and Consulting. "The next challenge is how soon it will start pushing up wages."

July’s unemployment rate dropped 0.1% compared to June, while the jobs-to-applicants ratio—a way of evaluating how many jobs are available per person who applies—rose to 0.94, the highest in five years.

Industrial production numbers prove that Japan, the world's third-largest economy, is on the slow road to recovery. But as anyone who’s ever heard the fable of the tortoise versus the hare, slow and steady often wins the race.

The CPI increase is an example of "cost-push" inflation, meaning high global energy prices (and a weakening yen) have pushed the price of foreign imports way up.  Higher prices end up causing more harm than good on a micro level because, through all of this, Japanese wages have remained the same. Until companies are willing to adapt their pay-structures, consumers may not feel the benefits of their economy’s stabilization. And if the government decides to raise taxes next April, the situation will only worsen.

Why are governments always willing to force families to suffer in favor of national security?

The Bank of Japan is struggling to convince the population that it can bring about a 2% growth in Gross Domestic Profit (GDP) in only two years. The bank’s theory is that inflationary expectations will drive consumers to spend and invest more, lessening deflationary pressure in the process.

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