"Good" and "Bad" Inflation in Japan

Well, one good turn deserves another. Claus and I are currently doing a spell of guest posting on the RGE Europe EconoMonitor at the moment (here, and here, for example), and true "just in time" fashion RGE Analyst Mary Stokes has a piece today about Japan's inflation issue.

Inflation is rearing its ugly head around the world, keeping many central bankers awake at night. In Japan, by contrast, it has received an almost enthusiastic reception. Many see the 1.3% yoy rise in Japan’s overall CPI in May – the eighth straight rise and a 10-year high - as a sign the economy has finally emerged from a decade of debilitating deflation.

But perhaps it’s not time to break out the champagne just yet. Below are some thoughts on the potentially good, bad, and ugly sides of Japanese inflation......

Looking more closely at Japan’s rise in consumer prices, it becomes clear that inflation has been driven by food and energy price hikes. When these items are stripped out, it’s much less clear that Japan has really shaken off deflation..

The potentially ugly side of Japanese inflation is that instead of boosting consumer spending, it could actually drag down growth. Imported inflation, via food and energy price hikes, may very well be suppressing domestic demand. The problem is that wage growth is accelerating only enough to offset inflation, as a report from Mizuho Corporate Bank points out. Official data show nominal wages growing an average 1.3% yoy for the first four months of 2008. This means wages were basically flat in real terms. So while inflation expectations may be shifting higher, as shown in some recent surveys, most consumers don’t have any more money in their pockets to spend. Nominal household spending actually fell in March, April, and May. In fact, spending by Japanese households in May slid 3.2% yoy, the sharpest fall in 20 months.

So where do you fall (no pun intended) on Japanese inflation – is it good, bad, or just plain ugly?