Japanese CPI growth hits 23-year high
The make up of consumer price index (CPI) data in many countries is not necessarily closely related to the cost of living. For example, in the US, ‘everyday’ consumer expenditure on food and energy has less than a 25 per cent weighting on their CPI, and is excluded altogether from a ‘core’ inflation.
The impact from the cost of basics such as food and energy has broad implications for consumer discretionary spending. And unless normal wages increase at a faster rate than the cost of basics, wallets are thinner.
To this end, consumer prices in Japan grew by 3.2 per cent in April from a year earlier, their biggest increase since 1991. The sales tax increase to 8 per cent from 5 per cent was largely to blame.
However, Japanese real wages are now falling due to stagnant wages. In the last two years, the Japanese yen has declined around 25 per cent from 78 to 102 against the US dollar, and this has coincided with the Nikkei 225 jumping from 8,500 points to the current 14,700 points (+73 per cent).
We note Japan has a public sector debt-to-GDP ratio exceeding 200 per cent, a fiscal deficit which is running at 10 per cent of its GDP and appalling demographic ramifications.
It does not seem logical to us to invest in Japanese 10-year bonds at the current yield of 0.58 per cent.