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BOJ Plans To Drop Inflation Target At Thursday's Meeting

The Bank of Japan is finally acknowledging something that Federal Reserve policy makers like San Francisco Fed President John Williams acknowledged months ago, when he published a paper highlighting the growing disconnect between the tightening labor market and consumer prices. As Credit Suisse strategist Burkhard Varnholt explained two months ago, the growing heft of e-commerce companies like Amazon represents a new disinflationary paradigm, weighing on the costs of consumer goods. Meanwhile, the intensifying three-way battle between Amazon, its chief brick-and-mortar rival Wal-Mart and discount grocers like Aldi have helped keep consumer prices anchored, while rent, tuition and medical costs have continued racing higher.

And now that the company is preparing to take over Whole Foods Market, fire the grocers' human employees and replace them with kiosks and sensors, allowing customers to walk out of the store with their items without waiting in a checkout line, the disinflationary trend is expected to continue. In fact, as the Washington-based e-commerce giant expands aggressively in other major developed and emerging economies, price pressures are expected to abate as the Bezos behemoth tightens the screws on its rivals.

Which brings us to the Bank of Japan, which the Wall Street Journal reports is planning to finally discard its controversial 2% inflation target during Thursday's policy meeting, according to people familiar with the CB’s thinking. The target will be suspended for the coming year, WSJ says, because of what it's calling "the Amazon effect."

Prime Minister Shinzo Abe was elected in 2012, promising to revive Japan’s stagnant economy by pushing unprecedented monetary loosening. The BOJ’s QQE program has been buying bonds and stocks while lowering interest rates to record lows.

Unfortunately for Abe, Japanese retailers have been cutting prices in response to the rise of online rivals like Amazon.com Inc., disrupting what had seemed like perfect conditions for Japan to get the stable dose of inflation it has long been looking for, according to WSJ.

This reflects continued resistance to price rises, despite Japan’s longest economic expansion in 11 years and its tightest labor market in decades. The Bank of Japan is also likely to raise its view on the economy while keeping its policy settings on hold, the people said.

“Japan isn’t alone in its surprise at the slow response of prices to improved economic strength. Policy makers, economists and central bankers in the U.S. and Europe are also scratching their heads about why prices around the world can move so little while economic growth gathers momentum—a factor that usually drives inflation.

 

Aeon Co., one of Japan’s largest retailers, said e-commerce has made competition more severe, especially when consumers remain budget-minded. Aeon, which operates Wal-Mart -like superstores that sell food and general merchandise, cut prices on milk, shampoo and more than 250 other products in April and is planning to do so again in August.”

Japan was the third-largest global market for Amazon.com Inc. in 2016 after the US and Germany, accounting for sales of nearly $11 billion, while some local websites offering cut-rate fashion such as Zozotown are also growing fast.

The importance of stable price growth is often lost on consumers who don’t have a nuanced understanding of economics. Below, WSJ explains the critical link between prices and economic growth.

…the BOJ and other central banks have long been concerned that broad overall price declines can hurt an economy by fostering a negative cycle of low corporate investment, low wage growth and general lack of vitality. The BOJ has targeted inflation of 2%, and it has pumped the equivalent of hundreds of billions of dollars into the economy each year through purchasing government bonds and other assets.”

Aeon President Motoya Okada said in April that consumer trends, including the low prices offered by internet retailers, left Japan unable to return to inflation after nearly 20 years in which prices have often been in decline.

“The end of deflation was a great illusion,” Okada said.

Previously, the BOJ and other major central banks blamed low oil prices for the dramatic slide in inflation witnessed since the summer of 2014, when prices peaked at more than $110 a barrel.  
But oil prices have stabilized recently, and although Japan’s price index edged into positive territory this year, still, the core inflation rate in May—covering all prices except for fresh food—was just 0.4%, suggesting that the central bank was missing something.

BOJ officials are finding it difficult to convince Japanese consumers that prices can, in fact, rise. One individual close to the central bank’s policy makers told WSJ that said Amazon was helping to further entrench this view.

The BOJ predicted in April that core consumer prices would increase 1.4% in the year ending March 2018, but it is likely to reduce that estimate, said people familiar with its thinking. Some of those people said recent data suggest it will be hard for inflation to reach the 2% target by March 2019 as the BOJ has projected. Another theory gaining ground at the BOJ is that Japanese companies are investing in automation to improve productivity and offset the higher costs of labor and raw materials, allowing them to avoid passing cost increases on to customers.