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Inflation Expectations in Japan at 7%, Spurs Consumption

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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.

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6 comments

  1. Anonymous

    Aren’t some of those savings in US bonds? And if they pull them out wouldn’t that increase rates here in the US?

  2. Anonymous

    Recognizing that the yen carry trade is back in full swing, would not consumer inflation in Japan strengthen the trade due to a weakening yen? That would seem to be the case nless and until the JCB begins to raise interest rates, thus strengthening the yen and diminishing the spread that accounts for the yen carry trade, in which case the carry trade would back off.

  3. S

    Barrons likes japan equities because pricing power is back (one of the reasons). Really sad and perverse. This is the lowest common denominator in investment thesis…the financial community knows no descency

  4. Vijay

    This whole inflation-expectations game is so absurd. Expectations are the result of inflation, NOT the cause of it. Inflation is the growth in supply of money and credit. The Keynsian view of inflation as price-inflation is not even well defined (what measure of price growth is even appropriate and why?)

    It’s very convenient for central banks to blame inflation on people’s expectations when they’re the ones cranking the printing presses.

    It’s amazing to me that so many people fall for this chicanery.

  5. Anonymous

    It’s amazing to me that so many people fall for this chicanery.

    The first time I heard about inflation expectations” and savings glut” was quite recent. In a discourse by Bernanke. Spending most of by professional life in non-economic circles, I was amazed by the total absence of decency that those words convey.

    “Saving glut” in one of the poorest countries of the world, overpopulated by the way, self-restraining their consumption to feed the West (in some way literally speaking). “Inflation expectations” is no better. All about a fireman finicking over the 911-phone on “what a fire really is”

    People will re-learn about the grasshopper and the ant pretty soon and economics…This gas and food inflation is only a nasty starting point. No economics is no consuming science… Consumption is a given in any society. Economics is all about working and saving first.

    The American people had a wonderful period of time in a wonder piece of land… You are are now joining in a “world of limited resources”. Welcome to our earth, with limited resources including limited money.

    This country need REAL economics. A la Volcker.

  6. DMD

    Jerks. “Savings Glut” indeed.

    My net worth is twice my income now, and will be 3 times my annual income within a year or two. Then 4 times, 5 times, 6 times, etc.

    I admire the Japanese for being thrifty savers. I wish my country (USA) had the same discipline. Something about the banks and the government telling me I need to spend my money just strikes as completely against my self-interest. But I couldn’t say why.

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