Inflation in Japan Is Finally Rising, but the BOJ Will Take It Easy With Monetary Policy

Inflation in Japan Is Finally Rising, but the BOJ Will Take It Easy With Monetary Policy

TOKYO—In Japan, where prices have been roughly flat for decades, inflation is finally taking off. But unlike the Federal Reserve in the U.S., the Bank of Japan has resolved to keep interest rates low, helping drive a fall in the yen.

On Thursday, the Japanese central bank resumed another bond-buying move aimed at keeping a lid on rates. It promised to purchase unlimited quantities of government bonds to cap the yield at 0.25%—less than one-tenth the return on the equivalent U.S. Treasury bonds. The notice of intent, which lasts until Tuesday, was enough to push the yield below the cap without any actual purchases Thursday.

The Bank of Japan’s unusual stance has propelled the yen to its weakest level against the dollar in two decades, jumbling the calculus that underpins hundreds of billions of dollars in annual trade and investment flows between Japan and the U.S.

The weak yen is one reason prices are rising in Japan, with consumer-price inflation expected to approach the central bank’s longstanding 2% target in the next month or two. Japan is paying more in yen terms for imports such as oil and food, while global energy shortages and supply-chain bottlenecks also push prices higher.

The normal central-bank playbook in such a situation would be to prepare for higher interest rates to control inflation. That would also tend to draw investor money into the yen and relieve the pressure on import prices.

But the Bank of Japan, led by Gov.

Haruhiko Kuroda,

says it isn’t ready to follow the Fed, which is preparing for multiple interest-rate increases this year.


officials believe the current inflation is a one-time phenomenon driven by factors outside of Japan’s control.

In the BOJ’s mind, such “cost-push” inflation contains the seeds of its own demise because it is likely to tamp down demand and cool the economy.

“Cost-push inflation caused by rising energy prices has negative effects on the Japanese economy by reducing households’ real income and companies’ earnings,” Mr. Kuroda said in Parliament on Monday. “It is appropriate to continue easy monetary policy so we can achieve the 2% inflation target in a stable and sustainable manner.”

Government numbers coming Friday are expected to show overall consumer-price inflation slightly topped 1% in March. Economists say the figure is likely to reach 2% in April or May, when the effects of price cuts last year for cellphone service taper off.

A shopping street in Yokohama. Japan’s consumer-price inflation is expected to approach the central bank’s longstanding 2% target in the next month or two.


Takaaki Iwabu/Bloomberg News

Except for brief intervals, Japan hasn’t seen such numbers since the 1990s. Yet the situation is a far cry from the U.S. The difference isn’t just in the extent of inflation—consumer prices in the U.S. rose 8.5% in March—but also in the attitudes of consumers.

U.S. consumers have helped accelerate price increases by snapping up houses, cars and electronics, even if they cost more. In Japan, price increases are mainly triggered by companies trying to preserve profit margins amid higher costs for inputs such as fuel and raw materials. The economy remains smaller than its prepandemic level.

“We cannot raise prices easily, considering Japan’s current economic conditions,” said

Tadashi Yanai,

head of Uniqlo clothing-store operator

Fast Retailing Co.

, at a news conference April 14.

Some supermarket chains including Seiyu Co., in which

Walmart Inc.

holds a minority stake, have promised not to raise prices of their store-brand products until at least June 30, seeking to steal market share from brands that are raising prices.

The BOJ’s Mr. Kuroda said he didn’t like to see the yen rapidly weaken because smaller companies have trouble passing on the cost of higher import prices and would see their profits decline. On Wednesday, a dollar bought as much as ¥129.40—the weakest level for the yen since April 2002—compared with around ¥115 at the beginning of this year.

Japan is closed to tourists because of Covid-19 restrictions, so a typical benefit of a cheap currency—luring bargain-hunting foreigners—doesn’t apply at the moment. Finance Minister

Shunichi Suzuki

labeled the recent moves a “bad weakening of the yen.”

As the cost of groceries, clothing and electronics have gone up in the U.S., prices in Japan have stayed low. WSJ’s Peter Landers goes shopping in Tokyo to explain why steady prices, though good for your wallet, can be a sign of a slow-growing economy. Photo: Richard B. Levine/Zuma Press; Kim Kyung Hoon/Reuters

Nonetheless, people familiar with the BOJ’s thinking say policy makers are reluctant to raise interest rates purely as a response to exchange rates. A small rate increase might not impress markets much when the Fed moves are so much bigger, they say.

Analyst Kota Nakayama of Nowcast Inc., which tracks minute-by-minute purchases at supermarkets, said Japan’s chief economic concern now was weak demand, not an overheating economy where prices could get out of control. The modest price increases so far have already hit demand in recent weeks, he said.

“If retail sales, including supermarkets and convenience stores, remain weak in April and May, it would make it difficult for companies to have the higher price tags,” Mr. Nakayama said.

Write to Megumi Fujikawa at [email protected]

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Rachel Meadows

Rachel Meadows

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