Japan prices stop falling but BOJ inflation goal seen a tall order

TOKYO Thu Jun 27, 2013 11:02pm EDT

A man shops inside a drugstore in Tokyo June 28, 2013. REUTERS/Yuya Shino

A man shops inside a drugstore in Tokyo June 28, 2013.

Credit: Reuters/Yuya Shino

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TOKYO (Reuters) - Japan's consumer prices stopped falling in May and labor demand reached its strongest level in five years, but the Bank of Japan's time frame for achieving a 2 percent inflation target still appears unlikely.

Industrial output rose at its fastest pace since 2011, in a sign of strength in the corporate sector, but an unexpected fall in household spending may raise some concerns about activity.

On the whole, the data on Friday signaled steady economic growth, but it may take more time to achieve sustained rises in prices even as the government's expansionary policies are making some progress towards ending 15 years of deflation.

"The results are mostly due to energy prices. The output gap is shrinking, but the core-core CPI shows that final demand is still weak," said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting.

"It's possible for the BOJ to ease (policy) again later this year, when it becomes clear that there's not enough progress in reaching its price target."

Core consumer prices, which exclude fresh food but include energy, were unchanged in May from a year earlier, matching the median estimate from a Reuters poll.

It was the first time in seven months that prices did not fall. Prices fell an annual 0.4 percent in April.

Japan's core-core CPI, which excludes both food and energy, fell 0.4 percent in the year to May, following a 0.6 percent annual decline in April, the government data showed.

AMBITIOUS TARGET

The BOJ unleashed the world's most intense burst of stimulus on April 4, promising to inject $1.4 trillion into the economy by buying government debt and riskier assets to meet its pledge of achieving 2 percent inflation in roughly two years.

Many private sector economists say the two-year target is overly ambitious. Even one member of BOJ's policy board has publicly called on the bank to loosen this time frame.

A Reuters poll of 24 economists showed last week that core consumer prices are expected to rise 0.3 percent in the current fiscal year to next March.

They saw consumer inflation picking up only to 0.8 percent in the following year to March 2015, stripping out impacts from a planned sales tax hike next year.

By contrast, the BOJ projects a 0.7 percent rise for this fiscal year and 1.4 percent rise for the next, followed by a 1.9 percent increase in the year to March 2016.

The last time Japan's core consumer inflation topped 2 percent for the year was in the early 1990s when its asset-inflated bubble economy collapsed. Later in that decade deflation set in the Japanese economy.

Finance Minister Taro Aso played down the significance of the fact consumer prices stopped falling, saying that it wasn't a sign of an immediate end to deflation.

"It's true that the pace of decline in prices is slowing, but it's not that easy (to end deflation)," Aso told reporters.

BRIGHT SIGNS

Separate data on the labor market showed the jobs-to-applicants ratio rose to 0.90 in May from 0.89 in April, meaning jobs were available for 9 out of 10 job seekers. This marks the strongest demand for workers in five years.

The unemployment rate was unchanged at 4.1 percent.

Wage earners' household spending fell 1.6 percent in May from a year earlier, sharply below the median estimate for a 1.4 percent increase.

Consumer spending is likely to expand as some shoppers buy more luxury goods and next year's sales tax hike prompts a last-minute buying spree, but some economists warn that spending will eventually slow as wages have not increased.

Industrial output rose by a better-than-expected 2.0 percent in May from April and the outlook is for slight net growth in coming months, data from the Ministry of Economy, Trade and Industry showed.

Manufacturers expect their output will fall 2.4 percent in June before increasing 3.3 percent in July, partly due to improving demand for cars from the United States.

In another bright sign, the Markit/JMMA Japan Manufacturing Purchasing Managers Index showed manufacturing activity expanded in June at the fastest pace in more than two years.

Japan's economy grew at an annualized rate of 4.1 percent in January-March, as private consumption and a rebound in exports led a recovery from a slump last year.

(Additional reporting by Stanley White and Leika Kihara; Editing by John Mair & Kim Coghill)

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Comments (2)
walstir wrote:
“the government’s expansionary policies are making some progress towards ending 15 years of deflation.”

Here is what 15 years of deflation looked like to customers of the Ford Motor Company looked like a century ago:

Original Model T Ford Prices by Model and Year

1910 $950
1911 $780
1912 $690
1913 $600
1914 $490
1915 $440
1916 $360
1917 $360
1918 $525
1919 $525
1920 $575
1921 $415
1922 $348
1923 $393
1924 $295
1925 $290

http://modelt.org/index.php?option=com_content&view=article&id=11:original-model-t-ford-prices-by-model-and-year&catid=5:history-and-lore&Itemid=1

Jun 28, 2013 10:01am EDT  --  Report as abuse
The improvement in the Japanese economy this year is due to bottled
up demand resulting from the 2011 twin disasters. It has taken 2 years
for the society and economy to recover and Japan is now back to where
it was before the disasters. The government now needs to introduce
“positive” economic policies as a follow up to what the BOJ is doing.

Jun 29, 2013 6:52am EDT  --  Report as abuse
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