I’ve been enthusiastic about the latest 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 influence of the yen depreciation? How responsive is the yen to rate of interest adjustments anyway? Are the rising yen-denominated import costs being handed on to Japanese customers? Why doesn’t the Takaichi Administration realise that within the face of supply-side inflation the treatment is to not develop fiscal coverage? How responsive are exports to the yen depreciation? All these questions are popping up frequently within the monetary media in the meanwhile. I haven’t time right this moment 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 fascinating 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 hold this considerably quick.
Actions within the yen
The Japanese foreign money (yen) has depreciated in worth considerably because the pandemic started.
The next graph reveals 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 placing because the USD struggled to carry worth.
I wrote about that on this latest weblog publish – Discuss of a Plaza Accord 2.0 ought to heed the teachings of Plaza Accord 1.0 (December 1, 2025).
Nonetheless, it’s the latest 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 many others).
OPEC oil worth hikes started in earnest in November 2020, rising from USD36.152 per barrel to USD114.83 per barrel on the peak in Might 2022.
It was the vitality worth hike that precipitated the rise in inflation, adopted by provide constraints that adopted the relief of Covid restrictions and the Putin folly.
The next graph reveals the trajectory of Japanese imported gasoline costs in each yen and USD phrases.
The actions are largely motivated by world components however we observe within the interval following the OPEC hikes from 2020 to 2023, the influence of the yen depreciation (blue yen line deviates from the USD purple line).
So the yen equal of the USD gasoline worth has diverged despite the fact that 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 mountain climbing charges, it knew that there can be an influence on the alternate fee.
When the Federal Reserve Financial institution began mountain climbing 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 major parity shift.
Within the final yr, the mainstream ‘specialists’ 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.
Nonetheless, different components have been at work.
After the – 2011 Tōhoku earthquake and tsunami – referred to as 東日本大震災 (Nice East Japan Earthquake) – the foreign money appreciated as a result of it was anticipated uncovered insurance coverage firms must repatriate international foreign money property.
That didn’t grow to be the case, however the foreign money appreciated nonetheless, despite the fact that financial and financial coverage is basically unchanged from that interval to now.
In the event you study the graph, you will notice a number of durations of appreciation, particularly because the Nineties, despite the fact that macroeconomic coverage has been constantly expansive over this complete interval (bar transient durations).
None of those occasions had a lot to do with home coverage.
For instance, we would ask what was occurring between November 2011 and August 2015, when the yen depreciated considerably towards the US greenback, giving again the shifts that occurred through the GFC?
Did the yen abruptly turn into an unsafe foreign money?
And if it did, why did the foreign money 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 fee adjustments.
All via these episodes, there have been steady Japanese fiscal deficits, a rising public debt ratio, a zero-interest fee financial coverage, and huge 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 fascinating case research.
It’s nicely understood that the Abe authorities from 2012 implicitly needed the yen to depreciate considerably as a part of his plan to reflate the Japanese financial system.
Earlier than his election, Japanese manufacturing was struggling towards the excessive yen worth, which bolstered the deflationary atmosphere and made it tough to advertise wages development.
The foremost shifts within the yen worth have largely mirrored world shifts in exercise and insurance policies and speculative efforts to revenue from them.
The bottom case is that the yen is a safe-haven foreign money regardless of some latest media reviews on the contrary.
There may be an on-going debate as to the extent that the so-called ‘carry commerce’ have pushed the actions within the yen lately.
The mainstream clarification is that the rate of interest differentials have motivated traders to shift yen, borrowed at low charges, into different currencies in the hunt for higher yields.
Whereas there isn’t any doubt this explains a number of the motion, a extra believable clarification is that the shift of the commerce stability to deficit lately promoted weak point within the foreign money (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 vegetation and elevated Japan’s vitality imports for energy era, driving the commerce stability to deficit.
The yen recovered with the return of commerce surpluses, adopted by depreciation as COVID lower into exports and commerce went into deficit.
As soon as the commerce stability returns to surplus, the yen will strengthen, pushed by commerce flows.
The newest CPI knowledge
The newest CPI knowledge for Japan is fascinating.
Here’s a graph produced from the newest worth knowledge issued by the e-Stat service of the Japanese authorities ().
It reveals the contribution to the general inflation fee of every of the Subgroup indexes for Japan for December 2025 (the newest knowledge)
The All-items index is in purple and I’ve solely labelled the bigger contributions (constructive or detrimental).
The present inflation is being pushed by meals costs in Japan.
The sooner influence of upper vitality costs is receding.
What’s driving the meals worth inflation?
There have been three interrelated home components:
1. Drought resulting in poor harvest – local weather change induced warmth wave via the 2023 Summer time lowered provide.
2. Farm prices rising – largely fertiliser and labour prices.
3. Enhance in demand because of the growth in tourism – significantly Chinese language vacationers.
It is a very fascinating driving issue.
The depreciation within the yen has helped gas an enormous vacationer growth in Japan during the last a number of years.
That has boosted ‘exports’ (tourism, despite the fact that 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.
But it surely has additionally pushed the demand for imports provided that Japan imports lots of meals and vitality.
This level generalises to financial growth 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 resorts that require airconditioning (vitality use) and eat lots of imported meals.
Ultimately, the influence might be detrimental 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 world 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 world and have included flooding, extreme warmth and lack of rain, which have lowered rice yields.
The necessary 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 dealing with labour shortages, that are rising supply prices for corporations.
Once more, that won’t be solved with rate of interest will increase.
Conclusion
And we additionally must get some perspective on all this.
The general inflation fee is simply 2.1 per cent anyway and falling, after an enormous depreciation and dependency on key imports similar to meals and vitality.
Power costs have fallen by 3.1 per cent during the last yr and that has nothing to do with financial coverage.
Even the meals worth 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 right this moment!
(c) Copyright 2026 William Mitchell. All Rights Reserved.
