naked capitalism

The Fed has tended to dismiss the inflationary impact of rising energy and food prices, arguing that they aren’t significant until they lead to inflationary expectations and higher wage demands.

Yet in Japan, where zero inflation to deflation has been the norm, and workers, like their American peers, lack bargaining power, not only have inflation expectations risen sharply, but consumers are engaging in classic inflationary economy behavior” anticipatory spending.

While this Bloomberg story indicates that the money so far is coming from money held in low to no yield bank accounts or as cash, one has to wonder whether this change in mindset might affect Japan’s army of predominantly female retail currency traders, the main drivers of the carry trade.

From Bloomberg:

A scourge that is threatening growth from Europe to China, inflation might be exactly what Japan needs. The prospect of higher prices may lift the economy by drawing out some of the 1,500 trillion yen ($14 trillion) Japanese households have squirreled away. Half sits in savings accounts paying almost no interest. Some is even stuffed under mattresses…

A 12 percent increase in the cost of gasoline this year has raised consumer expectations for inflation overall, after prices were flat except for fresh foods in 2007. A Bank of Japan survey found that households anticipate prices will go up by more than 7 percent in the next 12 months. That outlook helps explain why their spending climbed last quarter twice as fast as in the previous three months…..

According to the Paris-based Organization for Economic Cooperation and Development, consumers will spend enough this year to help Japan avoid a recession. Early evidence: The first quarter’s 0.8 percent increase in household expenditures accounted for half of the economy’s expansion after inflation, the government reported last week…

For the last two years, “domestic demand has been the big drag, the big disappointment,” Koll says. “2008 is a good year to be optimistic.”

Not everyone shares that optimism. Stanford University economist John Taylor says inflation is no good, no matter what. “You could go back to a real spiral, and things could get worse for Japan,” Taylor says. “It’s hard to believe at this point, but you could get too much inflation.”

A study published last month by Tokyo-based Nippon Research Institute showed that about 44 percent of households plan to cut back on spending this year because of higher food and energy prices….

Jessop argues that just because consumer confidence is weak doesn’t mean people will definitely be spending less. “You need to look at what people do, not what they say,” he says. Indeed, last quarter’s spending surge came in the face of the worst consumer sentiment since Japan’s last recession ended in 2002.

The explanation may lie with Japan’s hoard of household savings. “The amount of money involved is almost unimaginably large,” says Richard Jerram, chief Japan economist at Macquarie Group Ltd. in Tokyo. The Bank of Japan’s 1,500 trillion-yen estimate of household wealth — including bank deposits, cash and investments — represents roughly three times the country’s annual gross domestic product.