Japan prices turn higher, but BOJ’s goal remains tall order

Higher inflation driven by higher power bills rather than stronger demand that could drive a durable recovery

PUBLISHED : Friday, 26 July, 2013, 12:17pm
UPDATED : Friday, 26 July, 2013, 12:17pm

Japan’s consumer prices rose in June for the first time in more than a year, a positive sign for the government’s battle against deflation, but the rises centred on higher electricity bills rather than stronger demand that could drive a durable recovery.

Vanquishing 15 years of falling prices has been a top goal of Prime Minister Shinzo Abe and his hand-picked governor of the Bank of Japan, Haruhiko Kuroda, who announced in April a massive monetary expansion programme in a bid to stoke economic activity.

To that extent, Friday’s data showing the fastest price rise in nearly five years bodes well for the central bank’s bold stimulus plan to achieve 2 per cent inflation in two years.

But analysts warn that this target remains a tall order unless companies start to raise wages enough to make up for an expected sales-tax hike next year.

Core consumer prices rose 0.4 per cent in June from a year earlier, higher than a median market forecast for a 0.3 per cent increase, largely due to higher electricity bills and petrol prices.

Japan’s energy prices have been rising as a weaker yen has boosted the cost of imported fuel needed to make up for the closure of almost all the nation’s nuclear reactors after the March 2011 tsunami.

“Such cost-push inflation should not be taken as particularly positive,” said Yasuo Yamamoto, senior economist at Mizuho Research Institute. Market participants “are sceptical about the prospects for a steady pickup in inflation, with service-sector firms struggling to pass on costs to consumers due to a persistent output gap.”

Price falls slowed for some consumer electronics like television sets and air conditioners, an encouraging sign for the BOJ, suggesting more companies are optimistic enough about the economy to believe they can raise prices on goods or at least not cut them.

But most analysts agree that it’s too early to declare victory over deflation.

They note that the so-called good inflation of domestic demand stoking wage growth and consumer prices remain elusive.

“If you look at a narrower basket of goods without energy, the clear rising trend isn’t there yet and we can’t say with great confidence that Japan is clearly on its way out of deflation,” said Koichi Fujishiro, economist at Dai-ichi Life Research Institute in Tokyo.

“Only when wages start going up will we be able to say that it’s a more sustainable and meaningful trend. So far, it can still end on a short blip up.”

The increase in the core consumer price index (CPI), which excludes fresh food but includes energy costs, was the biggest since a 1.0 per cent gain in November 2008. Prices rose for the first time in 14 months in June, after flat growth in May.

Tokyo core CPI, a leading indicator of nationwide prices, rose 0.3 per cent in July after a 0.2 per cent increase in June, matching the median forecast, suggesting that Japan will see prices continue to rise in the coming months.

The BOJ unleashed an intense burst of monetary stimulus on April 4, promising to double the supply of money through aggressive asset purchases to meet its 2 per cent inflation target in roughly two years.

The move is part of Abe’s aggressive policy mix of monetary and fiscal stimulus to foster sustainable long-term growth, which has already seen positive signs such as first-quarter data showing Japan was the fastest growing major economy in the world.

In a glimmer of hope for Japan’s consumer electronic giants, which had seen profits plunge as fierce competition forced them to sell goods at lower prices for years, a broad range of durable goods saw price declines moderate, the data showed.

Prices of DVD recorders, for one, fell 8.4 per cent in June from a year earlier, slower than a 22.2 per cent drop in May.

But analysts warn against reading too much into the CPI rise, attributing the increase mostly to a 9.8 per cent gain in electricity bills and a 6.4 per cent increase in petrol prices.

Of the components making up overall CPI, prices fell for 53 per cent of goods and rose for 36 per cent of them, a sign inflation has yet to reach broader sectors of the economy.

Analysts expect prices to gradually rise reflecting improvements in the economy, but see the BOJ’s two-year framework in achieving its inflation goal as too ambitious.

Wages showed no annual growth for the second straight month in May, a sign Abe’s reflationary policies have yet to produce a sustained rise in household income.

If wages do not pick up, personal consumption may lose momentum, which will take a hit from a planned hike in the sales tax in April next year, analysts say.

“For most people, wages are not rising enough,” said Hidenobu Tokuda, an economist at Mizuho Research Institute.

“Realistically, I think the BOJ will eventually have to revise its time frame, because a two-year time span is too difficult.”