Japan’s persistent food inflation is becoming a growing concern for both households and the Bank of Japan (BOJ), as prices for everyday staples like rice and cabbage continue to surge. This escalating situation raises questions about the BOJ’s monetary policy and its potential impact on the broader economy.
Consumer inflation data, released on Friday, is expected to reveal a jump in overall price increases to 4% in January, up from 3.6% in December. This acceleration in inflation may compel the BOJ to raise its benchmark interest rate more aggressively than initially anticipated.
The dramatic increase in cabbage prices, currently at 2.6 times their five-year average, exemplifies the challenges faced by businesses and consumers alike. Katsumi Shinagawa, the owner of a Tokyo-based pork cutlet restaurant, highlights the impact of these rising costs. His establishment, like many others, traditionally offers unlimited cabbage as a side dish with their tonkatsu. Shinagawa observes that customers are now consuming larger portions of cabbage before their main course, a clear indication of the financial strain on household budgets. He expresses concern about the rising cost of cabbage, which is now approaching the price of pork, questioning the traditional roles of the main dish and the side.
This 4% inflation rate would solidify Japan’s position as the G7 nation with the highest inflation, a stark contrast to its historical struggle with deflation. While the core inflation figure, excluding fresh food, is projected to be 3.1%, the widening gap between overall and core inflation is the largest since 2016.
Central banks often prioritize core inflation when determining monetary policy because food prices, influenced by unpredictable factors like weather and labor shortages, are difficult to control through interest rate adjustments. Moreover, these fluctuations are typically transient.
However, BOJ Governor Kazuo Ueda has indicated a heightened awareness of food inflation. He recently acknowledged that he would consider food inflation when formulating monetary policy, recognizing its potential to become a persistent issue and influence consumer inflation expectations. Since 2010, fresh food prices have skyrocketed by 71.9%, significantly outpacing inflation excluding fresh food. The Ministry of Agriculture reported a 90% year-over-year increase in rice prices for the week ending February 9th.
A recent Cabinet Office report further emphasized the importance of monitoring inflation data that includes fresh food. Hideo Hayakawa, former BOJ chief economist, noted the significance of this observation, considering the BOJ’s reliance on core CPI as its primary inflation gauge. He suggests that if fresh food price increases persist, a core CPI below 2%, resulting in overall inflation around 2%, might be acceptable.
The government is also acutely aware of this issue. Former Prime Minister Fumio Kishida’s resignation was partly attributed to public dissatisfaction with rising inflation, particularly food costs. Current Prime Minister Shigeru Ishiba, facing a national election by the end of July, understands the political ramifications of this economic challenge. His ruling party suffered its worst electoral defeat since 2009 in October, largely attributed to inflation concerns.
Supermarket shelves stocked with food products.
Market analysts are also closely monitoring the situation. Daisuke Karakama, chief market economist at Mizuho Bank, anticipates the next rate hike in April, emphasizing the urgency of the situation. He points out the disparity between Japan’s leading inflation rate among G7 nations and its relatively low policy rate of 0.5%, arguing that the BOJ’s current measures are insufficient.
Traders have reacted to these concerns, driving bond yields to their highest levels since 2009 on speculation that the BOJ’s terminal rate in this tightening cycle might be higher, or that rate hikes may occur sooner than previously predicted.
After enduring three years of rising living expenses, Japan’s economy is finally shedding its deflationary mindset. The sustained increase in food prices could solidify consumer expectations of persistent inflation. The BOJ’s response to these evolving economic pressures will be crucial in shaping Japan’s economic future.
