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Japan’s Core Inflation Drops to Lowest in Three Years

Nov
12

Osaka JapanEfforts by Japanese government to boost inflation are still not yielding the desired results as the country’s core inflation declined again, as shown in newly-released data.

New figures made available by the Ministry of Internal Affairs showed that underlying inflation slumped virtually to zero in September – the first time that has happened since 2013. The “core-core” consumer price index (CPI) remained unchanged last month from a year ago.

Reading from the core CPI, which excludes food prices and volatile energy, indicates the extent to which stagnant prices have pervaded an economy that has somewhat become accustomed to deflation.

Headline inflation remained unchanged with a 0.5 percent on-year decline. Consumer spending, excluding housing, fell 1.1 percent without price adjustment and 0.6 percent in real terms.

The unemployment situation in the country is improving, with wages also growing. However, consumers do not seem willing to spend more as their incomes increases.

“Japan’s labor market continues to tighten and fuel faster wage growth,” Bill Adams, a PNC Financial senior international economist, said. “However, Japanese households are not spending their increased income.”

Japan’s unemployment rate dropped to 3.0 percent, according to the latest figures, falling slightly by 0.1 percentage points. The job openings-to-applicants ratio also improved to 1.38, the highest level in more than 25 years.

Adams said the Bank of Japan (BOJ) will feel its monetary stimulus justified by the latest data. He stated that an improving labor market will produce “inflationary pressures to raise CPI inflation to the Bank of Japan’s 2 percent target.”

The BOJ, which has been trying for years to achieve an inflation target of 2 percent, considers it vital to increase consumer expectations of future inflation. This it believes would cause employees to demand higher wages, with this driving up consumption and boosting the economy.

The newly-released data indicated onset of moderation in energy prices decline. Prices fell by 8.4 percent year-on-year in September, compared to 10.2 percent in the month before.

Investors are beginning to see some of the highest inflation levels in years ahead in many countries, except in Japan. Bloomberg reports five-year inflation swaps have stuck below 0.3 percent in the country, while equivalents in U.S and Germany have risen by higher percentages.

After more than three years at the helm, BOJ Governor Haruhiko Kuroda has not been able to change the deflationary mindset of the Japanese public. He has given slumping oil prices as a reason for his inability to steer a turnaround, but analysts have often criticized his choice of policies as being contradictory to set goals.

Japan’s central bank last month moved to boost confidence on future price increases by capping 10-year bond yields at zero. It also assured that inflation in the economy would overshoot the 2 percent target.

However, the yen has further weakened since that announcement, dropping below ¥105 on Friday.

It is unlikely that the new figures will cause a drastic shift from what the BOJ announced in September. The bank expects a rebound in the prices of commodities and a stable domestic currency to drive up inflation in 2017.

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