In some cases the central bank cannot control inflation while in others it cannot promote it!

Japan falls in the latter category. According to this article in the WSJ “Japan´s price target looks difficult”:

The nationwide core consumer price index rose 1.3% from a year earlier in June, after adjustment for a recent sales-tax hike, below a 1.4% increase the previous month, according to government data released Friday. Inflation moderated in May and June due to falling energy prices and a stable yen, which has put the break on growth in import costs.

Pessimists believe Japan’s recent exit from years of deflation has occurred mainly because of a collapse in the yen’s value last year, a result of a massive monetary stimulus not unlike the U.S. Federal Reserve’s. That decline pushed up the cost of fuel and other imports. As the yen has regained some lost ground this year, this pressure on prices has abated.

This is a common trap. People think of inflation as a price phenomenon and not as a monetary phenomenon. In that case: “a stable yen has put a break on growth in import prices”. But later: “the yen collapsed as a result of a massive monetary stimulus”.

So the correct line of thought is clear: Monetary stimulus caused inflation expectations to rise which caused the exchange rate devaluation (the “collapse” of the yen´s value).

But because the exchange rate is a “perfectly flexible” price it changes immediately, while inflation lags behind. This leads many to think it was the depreciation which “caused” the rise in inflation, when in fact both are driven by the rise in inflation expectations brought about by the monetary expansion.

The charts give a clear illustration. The inflation is that of the CPI-Core and is adjusted for the rise in the consumption tax in April of this year.


Note that the yen begins to depreciate immediately following the introduction of Abenomics. Inflation takes a while to “take-off” and by the time it does, the yen has already “stabilized”.

The articles author starts off by giving (unknowingly) the solution to the “mystery” of why it is thought the price target looks difficult. He writes:

Japan´s annual inflation rate was stable enough in June that it is unlikely to trigger a fresh round of monetary stimulus by the Bank of Japan.

So, it´s up to you, Kuroda, to make it likely!

4 thoughts on “In some cases the central bank cannot control inflation while in others it cannot promote it!

  1. So, it seems rather apparent, logically, that inflation isn’t the right concept on which to focus the development of public policy. Or am I overlooking some some missing link between the quotes that with the gap creates quite a spectacular absurdity.

  2. Pingback: In some cases the central bank cannot control inflation... | The Corner

  3. I think this the blind spot now…the inability to perceive that inflation may quickly fade…the meme is that inflation always accelerates…but Japan a d Europe and maybe the USA are disproving that…maybe the new norm is that inflation fades.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.