Core inflation is finally positive
Quantitative easing is nothing new for Japan, as the island nation essentially invented the policy in the 1990s. Japan has had negative CPI (consumer price index) inflation excluding food and energy for the last five years, but that changed in October with a year-over-year reading of 0.3%. It’s also the biggest increase since 1998, which makes the print notable from a historical standpoint.
Although manufacturing PMI rose to 55.1 in November and unemployment remained low, industrial production missed expectations and worker incomes fell.
Is the Bank of Japan serious about fighting deflation?
Despite the weak productivity data, the positive inflation is still meaningful. The Bank of Japan (the BOJ) increased the money supply substantially in the 2000s, but it withdrew the money as soon as inflation turned positive. One of the factors holding Abenomics back has been the BOJ’s past management of the country’s inflation rate. This is the central bank’s chance to show that it really means what it says about targeting 2% inflation.
One of the components of the bear thesis on Japan has been to question BOJ’s resolve to actually fight deflation. QE didn’t do much when the BOJ increased the money supply in the 2000s because the market (correctly) believed that the central bank would pull the money back at the first sign of inflation. When the BOJ then cut the money supply, no one was surprised and Japan fell back into deflation.
Whether or not Japanese stocks get another leg up to rally from these levels depends on the BOJ.
For more on Japan, see my series on the outlook for the Japanese economy and Japanese equities.
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