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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Over the course of July, Japan recorded a small month-on-month fall in one of the country’s most sensitive — and too often overlooked — economic benchmarks: the curry rice price index (CRPI). The dip was a cause for temporary relief, perhaps, following a steep rise over the previous two years, but not yet a licence for gluttony.The July shift in the CRPI catches the mass of Japanese households in a state of uncertainty, financial re-evaluation and enforced decision-making that few have experienced in more than three decades since the collapse of Japan’s late-1980s asset bubble.The national flip from years of stagnant or falling prices to sustained price inflation is unlike anything other major developed countries have experienced since the second world war. This is not just an adjustment to rising prices, but to the concept that everything over the past 30 years was an anomaly, and unlikely to be repeated. The CRPI data series, which is produced by private research group Teikoku Databank, tracks the aggregate costs of preparing Japan’s most cherished home-cooked meal — the rice and beef curry combination made by and for families across the country, with comfort, nutrition and budget the priority. It is obviously much narrower than government measures of inflation, but feels disproportionately representative of how the idea of inflation fixes in people’s minds.The ingredients include domestically grown rice, potatoes, onions and carrots, as well as the cooking oil and various processed roux sauces on which the dish depends for flavour. The index assumes, given Japan’s high dependence on imported food, the use of non-domestic beef. Via that key ingredient, the whole dish is exposed to exchange rates and what has been, for the past two years, a historic run of yen weakness. But the CRPI also factors in other yen-sensitive costs, such as electricity for steaming rice, gas for cooking the meat and water added to the pot, all of which have been subject to significant price increases.More from this reportIn July, according to Teikoku Databank, the entire cost of a single serving of curry rice was ¥438, down ¥2 from the June reading but a massive 28 per cent higher than the same month a year earlier, and more than 45 per cent higher than in July 2023. Much of that increase is attributable to the higher cost of domestic rice, which nearly doubled in price over the course of 2024, thanks to a combination of poor harvests, government agricultural policies and strategic hoarding by some wholesalers. The curry index merely confirms what national statistics have been showing for months: the measure of inflation that excludes fresh food stood at 3.1 per cent in July and has been hovering well above the Bank of Japan’s target of 2 per cent for 40 straight months. But the soaring cost of curry rice brings the plight of Japanese households into much sharper relief.Food, note economists at BMI, the consultancy, accounts for 17.8 per cent of Japanese household budgets, meaning the rise in food prices will force households to focus spending on everyday essentials, with less set aside for discretionary items. Furthermore, they add, elevated inflation has weakened wages in real terms: by BMI’s calculations, which adjust for inflation, Japanese households will have a purchasing power 4.2 per cent lower than the 2019 level by the end of 2025.Consumer spending looks very likely to be hit. But there are key areas where the effect of inflation is in the early stages of causing major change. Japan is not going to go back to deflation, says Morgan Stanley MUFG chief Japan economist Takeshi Yamaguchi, which means households need to consider investment and capital growth rather than the once perfectly rational strategy of leaving savings in the bank earning almost no interest.Many have tentatively begun to buy Japanese equities, taking full advantage of a tax-protected savings scheme. Those that have made the leap have found a stock market where companies are under unprecedented pressure to return money to shareholders. “On a macro basis, we are seeing a big increase in dividend payments to households. It would be rational for households to shift from deposits to risk assets,” says Yamaguchi.Inflation of the sort reflected in the curry index has also collided noisily with Japanese politics, creating precisely the sort of household-level dismay and dissatisfaction that has proved so fertile for populist parties globally. At the upper house elections in July, a stunningly large number of votes were cast for a radical populist party that has existed for only a few years. Many of its campaign speeches dwelt at length on the double challenge facing ordinary Japanese people: falling real wages and the rising cost of putting the most basic meal on the table.No economy has spent such a long time in deflation, wages are not rising rapidly enough for households to feel they can easily weather this new environment and no investor should underestimate the scale of the psychological and practical recalibration that is currently under way. More
Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The Rice Riots of 1918 were a traumatic episode in Japanese history, leading to strikes, looting and the bombing of police stations. Ultimately, they brought down the government of the day.Japan’s people are older, richer and more pacific these days, but rice is still the staple food, so a doubling of prices over the past year has led to widespread unhappiness and discussion of this century-old history.In particular, it has fuelled discontent with the Bank of Japan, which is in the process of slowly normalising monetary policy after years of deflation and ultra-low interest rates.Under governor Kazuo Ueda, the central bank has tightened policy for the first time in more than a decade. Rates now stand at 0.5 per cent, the highest since 2008.But if the return of inflation is a sign of monetary policy success, the public is inclined to think that failure might have been better.The BoJ’s problem is that modest success in achieving its goal — a self-sustaining cycle of rising wages and prices, intended to stabilise inflation at 2 per cent — has coincided with a series of one-off shocks that have driven prices well above that target.“Looking back, starting from 2021, we observed global commodity price hikes, including in the prices of crude oil and wheat, followed by the yen’s depreciation, both of which pushed import prices upward,” said deputy governor Ryozo Himino in a recent speech.More from this reportHimino argued that inflation was not systemic or structural. “Over this period, we have witnessed a pattern in which temporary inflationary factors are successively replaced by new ones.”Assuming this conclusion is correct, and today’s inflation is indeed temporary, the result is a difficult communications challenge for the central bank. Its view is that the domestic economy is still fragile, with inflation, excluding volatile food and energy prices, running at the much lower level of 1.6 per cent — and with the impact of US President Donald Trump’s tariffs on the way.Such fragility argues for caution and patience on further hikes in interest rates. Yet it leaves the BoJ at risk of seeming passive and uncaring in the face of soaring food prices.More broadly, economists welcome the return of wage rises and positive interest rates, which create a better environment for productivity growth. The crucial factor now for the BoJ is wages. In any economy, the largest cost for companies and the main source of income for consumer spending is the wage bill. Sustained inflation over the long run will therefore require steady growth in pay to workers.Japan’s largest labour unions secured a 5.25 per cent increase in wages this year — their highest pay deal in 34 years. But actual cash payments to workers have struggled to keep up with inflation, resulting in falling real incomes.The BoJ’s hope is that labour shortages, which are increasing in severity because of the ageing population, will fuel ongoing pay growth, while the one-off shocks to food prices will fade out over the next year or so.Trump’s tariffs are a threat to that scenario. Japan’s carmakers, already dealing with the rise of low-cost competition from countries such as China, rely heavily on exports to the US and they must now pay a 15 per cent tariff. If Japanese carmakers pass on the tariff cost to US consumers, they may sell fewer cars. If they do not, their margins will fall. Either way, their profits will come under pressure, and they will have less money to fund wage rises for their workers in Japan.In his speech, Himino identified three other channels by which US tariffs may hit Japan: uncertainty about the tariffs hurting investment; potential impacts via financial markets; and the possibility of a broader slowdown in the world economy.“Our baseline scenario assumes that the effects of trade policies will eventually materialise, leading to a slowdown in overseas economies and a decline in domestic corporate profits. In this situation . . . Japan’s economic growth is likely to moderate,” he said.For the Bank of Japan, then, it is two steps forward and one step back. After more than three decades, it does appear that deflation has finally been defeated. Yet the central bank needs more progress on wages to feel comfortable.Ueda projected a positive message about the final return of inflation at August’s meeting of central bankers in Jackson Hole. “Barring a major negative demand shock, the labour market is expected to remain tight and continue to exert upward pressure on wages.” More
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