I’ve been desirous about the current inflation trajectory in Japan within the mild of fixed calls from mainstream economists (together with a bevy of personal financial institution economists who work for establishments that profit from rate of interest hikes) for the Financial institution of Japan to hike charges. What’s driving CPI actions? What has been the impression of the yen depreciation? How responsive is the yen to rate of interest adjustments anyway? Are the growing yen-denominated import costs being handed on to Japanese shoppers? Why doesn’t the Takaichi Administration realise that within the face of supply-side inflation the treatment is to not broaden fiscal coverage? How responsive are exports to the yen depreciation? All these questions are popping up regularly within the monetary media in the meanwhile. I haven’t time at this time to reply all these questions intimately. However here’s a begin.
On Wednesday evening in London (that’s, Thursday Australian time) I helped launch a brand new enterprise the – MMTUK Coverage Analysis Group.
It was an attention-grabbing evening, and it’s good to see that our work continues to be attracting activism and it is a group that’s decided to affect financial and social coverage within the UK.
So by the point I returned house right here in London, it’s early within the morning (London time) and so I’ll preserve this considerably quick.
Actions within the yen
The Japanese forex (yen) has depreciated in worth considerably because the pandemic started.
The next graph exhibits the month-to-month motion within the yen towards the USD from 1980 to January 2026.
A downwards motion signifies an appreciation of the yen towards the USD and vice versa.
The foremost appreciation previous to the Plaza Accord within the early Nineteen Eighties is hanging because the USD struggled to carry worth.
I wrote about that on this current weblog put up – Speak of a Plaza Accord 2.0 ought to heed the teachings of Plaza Accord 1.0 (December 1, 2025).
Nevertheless, it’s the current interval that’s of curiosity on this dialogue.
The newest yen depreciation started in February 2021 (in January 2021 the yen was at 103.79).
Inflation didn’t begin to speed up till early 2022.
Putin invaded Ukraine for the second time in February 2022, after beforehand starting hostilities in 2014 (Crimea annexation and so forth).
OPEC oil value hikes started in earnest in November 2020, rising from USD36.152 per barrel to USD114.83 per barrel on the peak in Could 2022.
It was the power value hike that precipitated the rise in inflation, adopted by provide constraints that adopted the comfort of Covid restrictions and the Putin folly.
The next graph exhibits the trajectory of Japanese imported gasoline costs in each yen and USD phrases.
The actions are largely motivated by international components however we observe within the interval following the OPEC hikes from 2020 to 2023, the impression of the yen depreciation (blue yen line deviates from the USD purple line).
So the yen equal of the USD gasoline value has diverged although each are trending downwards.
When the Financial institution of Japan determined to carry rates of interest fixed within the face of the inflationary pressures on the outset of the inflationary episode in 2021, whereas the opposite central banks had been vigorously mountaineering charges, it knew that there could be an impression on the alternate price.
When the Federal Reserve Financial institution began mountaineering rates of interest in March 2022, the yen stood at 118.5774 towards the US.
Since March 2022, the yen has depreciated round 32.1 per cent towards the USD, a big parity shift.
Within the final 12 months, the mainstream ‘consultants’ declare that the depreciation proves that Japan’s persevering with fiscal deficits and the excessive public debt ratio are being rejected by the monetary markets.
Nevertheless, different components have been at work.
After the – 2011 Tōhoku earthquake and tsunami – often called 東日本大震災 (Nice East Japan Earthquake) – the forex appreciated as a result of it was anticipated uncovered insurance coverage corporations must repatriate overseas forex property.
That didn’t grow to be the case, however the forex appreciated nonetheless, although financial and financial coverage is essentially unchanged from that interval to now.
If you happen to look at the graph, you will notice a number of durations of appreciation, particularly because the Nineties, although macroeconomic coverage has been persistently expansive over this whole interval (bar transient durations).
None of those occasions had a lot to do with home coverage.
For instance, we would ask what was happening between November 2011 and August 2015, when the yen depreciated considerably towards the US greenback, giving again the shifts that occurred in the course of the GFC?
Did the yen immediately develop into an unsafe forex?
And if it did, why did the forex then begin appreciating once more as much as the interval when the central financial institution rate of interest differentials started to widen due to the totally different responses to the inflationary pressures?
Web exports went into deficit in mid-2011, as exports development faltered, and didn’t return to surplus once more till the September-quarter 2016.
It was commerce actions that drove the alternate price adjustments.
All by means of these episodes, there have been steady Japanese fiscal deficits, a rising public debt ratio, a zero-interest price financial coverage, and enormous quantitative easing purchases of presidency debt.
The depreciation that was related to the ‘Three Arrows of Abenomics’ which aimed to resume financial development and get away of the deflationary lock is an attention-grabbing case examine.
It’s properly understood that the Abe authorities from 2012 implicitly needed the yen to depreciate considerably as a part of his plan to reflate the Japanese economic system.
Earlier than his election, Japanese manufacturing was struggling towards the excessive yen worth, which strengthened the deflationary setting and made it troublesome to advertise wages development.
The foremost shifts within the yen worth have largely mirrored international shifts in exercise and insurance policies and speculative efforts to revenue from them.
The bottom case is that the yen is a safe-haven forex regardless of some current media experiences on the contrary.
There’s an on-going debate as to the extent that the so-called ‘carry commerce’ have pushed the actions within the yen not too long ago.
The mainstream rationalization is that the rate of interest differentials have motivated buyers to shift yen, borrowed at low charges, into different currencies in quest of higher yields.
Whereas there is no such thing as a doubt this explains a few of the motion, a extra believable rationalization is that the shift of the commerce steadiness to deficit lately promoted weak point within the forex (extra provide of yen to the market).
The yen depreciation that started in early 2012 coincided with the tsunami that shut down the nuclear energy crops and elevated Japan’s power imports for energy technology, driving the commerce steadiness to deficit.
The yen recovered with the return of commerce surpluses, adopted by depreciation as COVID reduce into exports and commerce went into deficit.
As soon as the commerce steadiness returns to surplus, the yen will strengthen, pushed by commerce flows.
The most recent CPI information
The most recent CPI information for Japan is attention-grabbing.
Here’s a graph produced from the most recent value information issued by the e-Stat service of the Japanese authorities ().
It exhibits the contribution to the general inflation price of every of the Subgroup indexes for Japan for December 2025 (the newest information)
The All-items index is in purple and I’ve solely labelled the bigger contributions (optimistic or adverse).
The present inflation is being pushed by meals costs in Japan.
The sooner impression of upper power costs is receding.
What’s driving the meals value inflation?
There have been three interrelated home components:
1. Drought resulting in poor harvest – local weather change induced warmth wave by means of the 2023 Summer time decreased provide.
2. Farm prices rising – largely fertiliser and labour prices.
3. Enhance in demand on account of the growth in tourism – notably Chinese language vacationers.
This can be a very attention-grabbing driving issue.
The depreciation within the yen has helped gas a large vacationer growth in Japan over the past a number of years.
That has boosted ‘exports’ (tourism, although it’s carried out domestically, is taken into account an export).
Which has put upward strain on the yen – foreigners demanding yen to do issues in a really cash-motivated society.
However it has additionally pushed the demand for imports provided that Japan imports a whole lot of meals and power.
This level generalises to financial improvement narratives (particularly from the IMF) that implore nations to develop their vacationer industries to ‘repair’ their commerce imbalances.
The issue is that tourism may be very import intensive as a result of vacationers keep in motels that require airconditioning (power use) and eat a whole lot of imported meals.
In the long run, the impression might be adverse however the boorish behaviour that comes with it that pushes the advantages to native communities in Japan over the cliff.
4. There has additionally been large-scale panic shopping for at supermarkets on the again of a prediction in 2024 that the Nankai Trough was about to ship the long-awaited earthquake.
However international components had been additionally at play, together with the export restrictions imposed by the Indian authorities in 2023.
And the climatic components that impacted Japan, have been international and have included flooding, extreme warmth and lack of rain, which have decreased rice yields.
The essential level is that these are all components, that are largely insensitive to rate of interest adjustments.
Along with these components, it’s now obvious that the transport sector is going through labour shortages, that are growing supply prices for companies.
Once more, that won’t be solved with rate of interest will increase.
Conclusion
And we additionally have to get some perspective on all this.
The general inflation price is just 2.1 per cent anyway and falling, after a large depreciation and dependency on key imports reminiscent of meals and power.
Power costs have fallen by 3.1 per cent over the past 12 months and that has nothing to do with financial coverage.
Even the meals value inflation is declining because the nation adjusts to the host of things mentioned above which have pushed the rise in meals costs.
I’ll reply the opposite questions posed within the Introduction in additional element one other day.
That’s sufficient for at this time!
(c) Copyright 2026 William Mitchell. All Rights Reserved.