Sometimes, the best news about global economics can come in surprisingly small blips. And that is true of the latest reports out of Japan. Consumer prices rose 0.3 percent in the year ending in October in that country, when food and energy are excluded.
Nothing special, right? What makes it interesting is that that was the highest year-over-year inflation since June 1998. For 15 years, the world's second-largest economy has experienced gradually falling prices, a crushing deflation that made debts more onerous, created disincentives for spending or investment, and generally held the nation in a cycle of stagnant growth and incomes.
The most vivid international symbols of Japan's (slow, uncertain) economic recovery are in export markets. Sony, after a decade in the new-product doldrums and nearly five years of losses, is counting on the new PlayStation 4 to drive a new era of profitability. Toyota has recorded double-digit sales increases and a sharp rise in profits.
All that's great for anyone who isn't trying to compete with Sony and Toyota in the global marketplace. But it isn't the success of any individual company or product that will decide the success of "Abenomics," the aggressive program of Keynesian stimulus pursued by the government of Prime Minister Shinzo Abe over the last year.
The success of Sony and Toyota is an effect. Higher inflation is, indirectly, the cause. Here's what the two have to do with each other.
On taking office, Abe and his hand-picked Bank of Japan governor Haruhiko Kuroda pledged to do whatever it takes to get Japanese inflation up to 2 percent, following 15 years of generally falling prices. That was enough to drive a remarkable decline in the value of the yen on global currency markets -- from around 80 yen to the dollar a year ago to 100 to the dollar now.
That 25 percent decline in the value of the yen has given Japanese companies like Sony and Toyota a remarkable advantage on global markets, essentially lowering much of their cost structure by that much within just a few months. If you're Mazda, selling cars that compete with Ford and Chrysler, or Nippon Steel, competing with U.S. Steel and Nucor, you have a more advantageous position thanks simply to words from your prime minister and central banking.
But currency markets only moved the way they did because they believed Abe and Kuroda. The yen fell because investors believed that inflation would indeed return to Japan, and that yen would buy less stuff in the future. The higher inflation numbers reported on Thursday, therefore, did almost nothing to move the value of the currency; it was already priced in.
The important reminder for Japan's leaders out of the latest wave of inflation data is this: The battle isn't won yet. By most standards, an 0.3 percent annual increase in inflation is still really really low; it only seems high relative to the deflation that Japan has been experiencing. Even using the inflation measure favored by the Bank of Japan, which includes energy but excludes fresh foods, Japanese prices rose 0.9 percent over the last year, which is still far below the 2 percent that the bank is aiming for.
Just as currency markets priced in higher inflation last winter and spring, inflation that is just now starting to materialize, if markets perceive that the government is taking the uptick in prices as victory, things could swing the other way just as quickly.
In other words, the record on Abenomics is so-far, so-good. There is a lot more reason for optimism that the world's third-largest economy has a true recovery underway than there was a year ago, and the most recent inflation data is an important part of that story. But nobody in Japan should be partying like it's 1989.