In October, as economists had earlier predicted, consumer prices in Japan slipped for the 20th consecutive month; the decline, however, moderated somewhat as a result of the Japanese government’s recent increase of taxes on tobacco products. The Japanese Statistics Bureau reported late yesterday that, year-on-year, consumer prices, which excluded fresh food products, fell .6%; the hefty 33% tobacco tax, which was imposed on October 1st, added .28% to the number.
Embedded and persistent deflation is putting significant pressure on the Japanese economy, which some experts suggest may contract in the 4th quarter, especially given the Yen’s appreciation against the U.S. Dollar and other major currencies. This year, the Japanese currency has appreciated more than 11% versus the greenback, in spite of September’s intervention by the Bank of Japan. The Yen is showing some weakness in trading today, with USD/JPY and EUR/JPY at 83.83 and 111.04, respectively, which is likely attributed to the escalating Korean conflict.
The strong Yen is exacerbating declining prices, which in and of itself has a whole host of detrimental effects on the economy, including making imports cheaper, eroding corporate profits, as a result pressuring salaries, etc. On the flip side, the Strong Yen makes exports more expensive; it was recently reported that for the 3rd consecutive month real exports were down -1.2%, and were it not for exports to China and Asia, that number would have been even more dismal, as shipments to the E.U. was 1.9% lower from the same period a year ago, while to the U.S. there was only a 4.7% increase.
There has been growing pressure on the Bank of Japan to be more aggressive in fighting deflation, and the political parties on both sides are demanding legislation that would effectively give politicians more of a say in monetary policy. The country’s constant political wrangling has also played a factor in the lack of monetary policy cohesiveness.