TOKYO – To get a sense of where inflation is heading, you could peruse mountains of data, charts and investment bank reports. Or you could just examine central bankers’ travel schedules.

A resurgence of Covid-19 cases just forced the US Federal Reserve to cancel its annual in-person Jackson Hole, Wyoming retreat. Each year, monetary bigwigs from Washington, Frankfurt, Tokyo, Sydney and everywhere else gather in the mountains to mull the big economic quandaries of the moment.

This year, of course, the debate is over whether inflation is about to explode and cream markets as economies reopen from pandemic lockdowns.

Yet the cancellation of conference rooms in Wyoming – it’s now a Zoom meetup – suggests a non-panic attack.

On inflation, at least.

With blistering speed, the debate has pivoted from runaway inflation to fresh Covid-19 waves necessitating more monetary easing. And, for that matter, fears that central banks would spend the rest of 2021 tightening.

“The key reason is the subdued inflation outlook,” says economist Stefan Angrick at Moody’s Analytics.

Sure, inflation could flare up at any moment. And given the last several months, during which US consumer prices suddenly jumped 5%-plus year-on-year, the threats were real.

The debate has pivoted from runaway inflation to more monetary easing. Photo: AFP / Xie zhengyi / Imaginechina

But as Delta does its worst and other, even scarier, variants emerge, and as advanced countries’ vaccination drives, that had looked so rosy so recently, start to wobble, central bankers are pivoting back to the big debate of 2019: Japan.

In the pre-Covid era, the question was which large economies might face a scenario where they fall and can’t get up again. That’s been Tokyo’s plight for decades now, and it could extend to economies from the US to the UK to Europe to South Korea to China – really, anywhere – this year.

At a minimum, this means today’s inflation worries need a serious reality check. It’s not that deflation is afoot. But the return of slack in labor and product makers may prove more troublesome, particularly as these dynamics become more and more ingrained.

The overhang of 2020’s trauma to consumer and business confidence is now colliding with fresh uncertainty about where growth and employment levels might be in 2022. This augurs poorly for pricing power, regardless of what happens with supply chains and key commodities getting scarce.

Some economists are less sanguine. Count Maurice van Sante at ING Bank among them. He thinks we are in a for a bumpy ride for a while to come.

“It will take at least until the summer of 2022 before we expect the price of some building materials, notably concrete, bricks and cement, to drop,” he says. “Construction firms’ suppliers first need to improve their historically low levels of inventories. The price of timber and steel will probably settle down earlier.”

‘Push of the string’

It’s here where the lessons from Japan may be particularly relevant.

The biggest of those lessons, perhaps, is that it’s easier to cap inflation than revive an economy that’s settled into a negligible growth-zero inflation. Since the late 1990s, Japan has been struggling to generate inflation, any inflation. And largely without success.

Japan’s former prime minister Shinzo Abe failed to generate inflation with the appointment of a new central bank governor. Photo; AFP Kunihiko Miura / The Yomiuri Shimbun

In March 2013, then-Prime Minister Shinzo Abe hired a new Bank of Japan governor to turbocharge Tokyo’s effort to restore pricing power.

Haruhiko Kuroda came in fully armed, firing the first of a series of monetary “bazooka” liquidity shots into the banking system. For a time, those blasts drove the yen down 30% versus the dollar and euro, boosting exports and corporate earnings.

In 2013 alone, the Nikkei Stock Average soared 57%. Over time, the Kuroda BOJ cornered the government bond market. So ginormous were its purchases that it’s not uncommon for no bonds to change hands at all during entire trading sessions.

Then, the BOJ’s stock hoarding via exchange-traded funds made Kuroda’s team the largest holder of Nikkei shares, even topping the huge Government Pension Investment Fund.

And yet, inflation barely got above zero – nowhere near the 2% target. When consumer prices did get close to 1%, it was thanks to “bad” inflation imported via surging oil prices and an undervalued currency.

The problem? The supply of yen in the system far exceeded uses for all that credit. Without borrowers stepping forward and banks extending credit readily, a central bank loses the multiplier effect that makes monetary policy shifts so potent.

All this has left the BOJ “pushing on a string,” as money-market economists put it.

Of course, being out of sync with global growth and inflation trends has kind of been Japan’s brand these last 20 years or so. When other Group of Seven nations zig, the land of the setting economic sun tends to zag.

This divergence played out again as China and the US rebounded from Covid-19 while Japan turned in a more modest revival.

Bank of Japan governor Haruhiko Kuroda’s liquidity shots into the banking system drove the yen down 30% for a time versus the dollar and euro. Photo: AFP / Jiji Press

Now, Japan is cratering faster than other major economies. Factory activity weakened in August. Services ground to a halt, shrinking at the fastest pace since May 2020. Both data sets dramatized the heavy toll the fourth wave of Covid-19 infections is taking on the economy.

The Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index dropped to a seasonally adjusted 52.4 in August from 53.0 in the prior month. Yet the Jibun Bank Flash Services PMI dropped to a seasonally adjusted 43.5 from July’s 47.4.

“The decline in overall private sector activity was led by the larger services sector, where business activity fell for the 19th consecutive month,” says economist Usamah Bhatti at IHS Markit, which compiled the survey.

“Private sector businesses noted that the recent surge in Covid-19 cases related to the Delta variant had dampened prospects.”

Hold that taper

Delta, of course, is also dampening the mood of central bankers who’d planned to be in Wyoming’s Grand Teton mountains in the days ahead.

Yet the sessions will still play out via video, affording policymakers a rare chance to compare notes.

The pressing issue is whether it’s time for central banks to begin tapering – or hit the well-worn monetary accelerator anew. What’s interesting, is that this is the same debate BOJ head Kuroda was leading around this time in 2019, before the pandemic hit.

As the events of recent months remind us, inflation surging at a rate unseen in decades is a real and present danger. As economies reopened, just about every material needed for construction, transportation, tech gadgets, food production, you name it, surged in price.

The People’s Bank of China is likely to be patient as Covid-19 rears its head again in the mainland. Photo: AFP

Between March 2020 and mid-May 2021, the Bloomberg Commodity Spot Index, which includes the prices of 23 raw materials, surged 70%, the highest in a decade.

Yet the Delta shock, and other Covid-19 variants in the pipeline, is changing the calculus.

This makes it more likely that inflation pressures will indeed prove transient – at least for the time being – and that central bankers will come under fresh pressure to support economies.

That will cast a renewed spotlight on whether Japan’s plight will spread to other economies.

It’s not just the BOJ that’s in the spotlight these days, but Japan’s Ministry of Finance as economies like the US amass government debt with abandon. As US public debt surges toward $30 trillion, Japan’s own experience with a debt load so heavy it probably won’t ever get repaid in the conventional sense becomes relevant, too.

Not default, per se. Japan has avoided that fate. But the US is more vulnerable to capital flight.

America’s dollar plight

Printing the reserve currency means, in the words of Cornell University economist Eswar Prasad, “the dollar reigns supreme, by default.” That dynamic explains why 20-plus years after the Asian financial crisis, the region’s central banks are still sitting on nearly $4 trillion dollars.

The catch, Prasad says, is that the US must be careful not to take global trust for granted. Former US President Donald Trump did just that, including waging a highly disruptive trade war with China. Since President Joe Biden’s arrival in January, the dollar has regained its footing. To some extent.

Federal Reserve Chair Jerome Powell. Photo: AFP / Al Drago

Exploding inflation is one of the outcomes Prasad argues the US must avoid. As such, Fed Chairman Jerome Powell’s team is on the clock as rarely before. Until now, Powell & Co generally argued that inflation about 5% is only a short-term phenomenon, largely a product of data base effects from 2020 and supply/demand mismatches that can be ironed out.

The Fed, though, could quickly lose control of pricing trends and the global credibility that’s so central to the dollar’s health.

“They’re in a straitjacket,” says Allianz advisor Mohamed El-Erian. “There’s a window for an orderly normalization” of interest rate policy. “I worry that window will close if inflation dynamics get out of control.”

The BOJ, meantime, is decidedly on hold.

“More significant tightening, including a higher short-term policy rate and higher 10-year bond yield target, is unlikely so long as demand and inflation remain subdued,” Angrick says. “We therefore expect the BoJ’s long history of zero and negative interest rates to stretch further into the future.”

What of China, which recently saw inflation surge as much as 9% in July? Patience on the part of the People’s Bank of China, most likely, as Covid-19 rears its ugly head again in the mainland.

“The PBOC will remain restrained, particularly with respect to rate cuts,” says analyst Michael Hirson at Eurasia Group. “Any easing measures will remain narrowly targeted on credit support for small and medium-sized enterprises and mitigating debt risks rather than strong countercyclical measures to boost headline growth.”

The common thread across key economies is that the Delta variant is doing central banks’ jobs for them by capping the inflation surge that seemed sure to upend 2022 and beyond.

For now, at least.