Japan | When too much inflation is a long-awaited victory

You have to hand it to Haruhiko Kuroda. Despite his caricature as a laggard in a world where interest rates are marching higher, the Bank of Japan chief was cutting-edge when seeking to exceed his inflation target. It's just taken a while to get there. Six years, in fact.

Tempting as a victory lap might be for Kuroda, who retires next year, more hard work awaits. With inflation above the 2 percent goal for the fourth consecutive month in July, according to figures released on August 19, choices loom that were once considered so far in the distance as to be almost theoretical. Does Kuroda stand by his uber-easy stance or take a baby step toward adjusting interest rates to levels that aren't by global standards so abnormally low?

What is normal in a country that flirted with deflation for much of the past three decades, pioneered zero rates, and was an early mover on quantitative easing? In some ways, the unconventional has become standard operating procedure in Japan, and quite familiar in the West. The case for deviating must be compelling. At the same time, if prices continue to creep upward toward 3 percent, it’s going to get harder for Kuroda to just say the equivalent of ‘No, no, no’ anytime a question is asked about the possibility of the slightest tweak to arrangements.

When the BOJ enshrined in policy the desire to reach beyond 2 percent, few people paid much heed. Consumer prices were declining in September 2016. The idea was that getting inflation above the goal — and tolerating that for a while — boosted the chances it would settle around the target. It didn’t just have to fall across the line; inflation would need to ‘stay above the target in a stable manner’. Welcoming the overshoot was meant to underscore the BOJ’s seriousness. The approach was later adopted, to varying degrees, by the US Federal Reserve, and the European Central Bank.

Kuroda might now justifiably ask why he needs to do anything at all: Inflation is still low compared with most major economies, and with the prospect of a global recession looming, why risk misfiring with a hike that he — or his successor — will have to withdraw. He is also justified in scepticism that ingredients are there for a sustained price push.

Sure, costs are higher than anyone can remember, with electricity and gas bills accounting for about half of July’s 2.4 percent increase. Pain at the checkout is only going to increase in the short term, with another surge of price hikes expected in the autumn. Some 8,000 grocery items will cost more from next month onward, according to Teikoku Databank; everything from sushi to beer is set to be affected.

Kuroda may be the latest major monetary player to adhere to the idea this is all ‘transitory’, to use a term once favoured by US Fed Chair Jay Powell that’s since been buried. The BOJ expects inflation to stay in the 2 percent zone this year before receding next year. While the bank’s inflation forecasts in the past could generously be described as optimistic, there are good reasons to think that this time they’re right.

There’s little sign of the wage increases that are crucial to maintaining momentum. A 31-yen increase in the minimum wage might well be a record, though broadly in line with trends over the past decade, and unlikely to move the needle.

While summer bonuses have risen at large companies, the small- and medium-sized firms in the middle are getting squeezed. Real wages have fallen for three straight months when adjusted for inflation. In an encouraging move, Prime Minister Fumio Kishida has made boosting salaries a focus of his policies, but he hasn’t spoken at all about the tough labour market reforms that would be needed to turn that vision into reality.

Without higher wages, the current wave of price hikes might look more similar to Japan’s two sales tax increases in the last decade — a temporary blip that passes, leaving consumers’ wallets permanently lighter. With recession waiting in the wings, pressure on the bank to tighten is starting to fade. Kuroda can move slowly. It’s a taken a while, but the world is inching toward him.