As oil slumps, BOJ relies on yogurt, ketchup to hit price goal

PUBLISHED : Tuesday, 28 July, 2015, 1:34pm
UPDATED : Tuesday, 28 July, 2015, 1:34pm

Desperate to convince consumers that inflation really is picking up, the Bank of Japan is taking advantage of a gradual rise in food prices, from yogurt and ketchup to "gyudon" beef rice bowls - once a symbol of Japanese deflation.

With the main official gauge showing inflation stalling due to weak oil prices, the central bank has come up with its own index that conveniently shows inflation accelerating towards its 2 per cent goal.

The move underscores the emphasis the BOJ puts on the psychological effect of its massive money-printing programme, which aims to banish public perceptions that falling prices will persist so that households and companies will start spending.

It also highlights a growing reluctance within the central bank for expanding the radical stimulus it launched in April 2013. But the focus on rising food prices, due more to a weak yen than strong consumption, is a gamble as they could stall if increased grocery costs pinch households and dent broader domestic demand, analysts say.

"The BOJ used to say it won’t make any excuse for missing its target. Now it’s doing just that," said Hideo Kumano, a former BOJ official and currently chief economist at Dai-ichi Life Research Institute. "I wonder what it will do if food prices start to fall."

Persistent deflation can hurt an economy because it encourages consumers to hold off from spending, while businesses are forced to discount - symbolised in Japan’s years of deflation by the falling cost of the bowls of stewed beef and onions over rice that are a staple fast food nationwide.

Japan’s key price measurement is the core consumer price index (CPI) released by the government, which strips away the effect of volatile food prices, such as vegetables, but includes other food prices as well as energy costs.

Measured by that index, which the BOJ uses as its key price indicator, inflation has ground to a halt and may fall slightly until around September due largely to last year’s oil rout. That has cast further doubt on the BOJ’s argument that inflation will hit 2 per cent by September next year, keeping it under pressure to top up stimulus.

However, with central bank’s bond purchases in the market already roughly equalling new government debt issuance, there are doubts about how much further it could go, while some BOJ officials also worry about sowing the seeds of an asset bubble.

BOJ Governor Haruhiko Kuroda has said the central bank will look through the effect of oil moves and won’t ease policy further as long as a broad uptrend in inflation, backed by an economic recovery, is intact. But BOJ officials fret that even several months of soft CPI data could hurt inflation expectations.

Keen to contain the damage to expectations, the BOJ began releasing this month a new price gauge that strips away both energy and fresh food - but includes non-fresh food prices that are rising due to higher import costs from a weak yen. The index showed inflation accelerated to 0.7 per cent in May from 0.4 per cent in January, as companies such as Kagome Co raised the price of ketchup for the first time in 25 years.

The government’s core CPI, on the other hand, remained roughly flat this year and hit 0.1 per cent in May. The BOJ says if the new index exceeds 1 per cent, core CPI will reach 2 per cent once the effect of the oil drop dissipates.

The BOJ will continue to use the government’s core CPI as its price target and argues that the new gauge is among various indicators it will use to analyse price trends. But some analysts say the BOJ is putting its credibility on the line by giving markets the impression it is favouring one data over another.

"The BOJ has become a cheerleader for inflation, rather than a central bank that takes an unbiased look at data," said Masaaki Kanno, chief Japan economist at JPMorgan Securities. "Whatever the BOJ says, people may start to consider it as another promotional campaign."

The new indicator may also backfire if rising living costs hurt consumption, which has been disappointingly weak on tame wage growth, and prompt companies to stop raising price. The government’s core-core CPI - which strips away energy and all food costs - has hovered around zero and rose just 0.4 per cent in May, a sign prices hikes are not broadening beyond goods directly affected by rising import costs.

"The price rises we’re seeing now might be temporary," said Izuru Kato, chief economist at Totan Research."For inflation to approach 2 per cent, you need to see more broader price rises. That’s not happening yet."