It may be too early to expect any change to yield curve control at this week’s BoJ meeting. The slow grind higher in US Treasury yields has helped push the yen down, but it remains above the recent low of Y/$117.9 on December 15th 2016. Oil prices have fallen and could be crushed by the rise of renewables. Nevertheless, the strong employment gains and multiple reports of a tight labour market raise the possibility that the BoJ will follow the ECB’s lead and declare victory over deflation.
Japan’s battle with debt deflation during the 1990s provided a glimpse into the policy challenges central banks would face across the West post-2008. Japan now offers a useful template for the next policy dilemma: how far will underlying inflation rise when an economy is close to full employment. On most measures, Japan faces chronic labour shortages. In some cases, this is filtering through to higher prices. Yamato Transport is pushing ahead with its first increase in fees for 27 years in response to the boom in online shopping. The backlash against long hours is being supported by the Government, which is leaning on companies to allow workers to leave early on Fridays.
However, the annual Shunto negotiations disappointed as several large companies offered meagre increases in base wages. Indeed, Japan has the capacity to drive through big productivity gains, neutralising some of the upward pressure on costs. The 2% inflation target could prove elusive. Japan is extending its lead in robotics with the adoption of AI. The Japanese Government is putting pressure on car manufacturers to deliver fully driverless vehicles by 2020. Automated truck convoys are being trialled, with a view to cutting costs. The BoJ may strike a more optimistic note tomorrow, but it remains to be seen how close Japan is to a rise in underlying inflation.
Summary
- BoJ unlikely to change YCC, may be tempted to declare victory over deflation
- Nevertheless, rapid technological changes are keeping costs low
- Underlying inflation may be weaker than headline CPI suggests
