Japan 'Defeating' Deflation? Not Quite, My Friend

There is much debate in Japan as to whether the Bank of Japan's efforts to pull the country out of a deflationary spiral are bearing fruit. True, Japan's consumer prince index is actually showing a positive trend, but this may be largely down to temporary factors and not to any structural change. What happens when the central bank spigots close? The questions facing the developed world are  similar in certain respects. Moreover, Japan's shuttering of nuclear reactors in the wake of the Fukushima incident has caused price rises that may soon be undone as more plants come back online:

Japan’s core consumer price index, excluding volatile fresh food prices, rose 0.8% in August from the same month a year earlier. That prompted private economists to raise their forecasts closer to the central bank’s 0.6% rise on average for the current fiscal year ending March.

People familiar with the central bank’s thinking say it sees the index going as high as 1.0% by the end of this year. But private analysts still see any such a rise — driven largely by higher imported energy costs — as unsustainable.

Strip out the energy component of CPI and the news is much less headline-worthy. You guessed it--Japan remains in deflation territory:

Japan’s inflation accelerated to the fastest pace since 2008 in August on higher energy costs, underscoring pressure on Prime Minister Shinzo Abe to drive wage increases as he seeks to end 15 years of deflation.

Consumer prices excluding fresh food increased 0.8 percent from a year earlier, the statistics bureau said today in Tokyo. The median forecast of 30 economists surveyed by Bloomberg News was for a gain of 0.7 percent. Stripping out energy and perishables, prices fell 0.1 percent. 

This is non-news in the war against deflation. Can this artifice continue, though? While global energy prices are unpredictable, some commentators argue that restarting more nuclear reactors is tied to the success or failure of Abenomics. Pessimistically and perversely, then, it is possible that souring consumer sentiment caused by greater dependence on foreign energy may instead forestall the reactivation of Japanese nuclear plants:

In all likelihood, the success of Abe’s nuclear agenda will rest upon the success of his economic agenda. If the public and his party remain confident in the direction of Abe’s economic policies, he will likely be able to sell nuclear energy as an integral part of his vision.

What can I say? Japanese political economy is weird even by Asian standards and cannot be directly interpreted from Western example.