Japan inflation hits five year-high, wage gains needed to decisively end deflation

TOKYO Fri Sep 27, 2013 1:47am EDT

1 of 2. Office workers walk inside a building in Tokyo September 26, 2013.

Credit: Reuters/Issei Kato

TOKYO (Reuters) - Japan's core consumer inflation in August hit its highest level in nearly five years, while prices of personal electronics rose for the first time since 1992 - signs Japan may be emerging from 15 years of nagging deflation.

Core consumer prices, which include oil products but exclude volatile prices of fresh food, rose 0.8 percent in August from a year earlier after a 0.7 percent increase in July, marking the third straight month of gains.

It was the fastest rise since November 2008, when core consumer inflation hit 1 percent reflecting a spike in global commodity prices, government data showed on Friday.

But most of the increase was caused by rising gasoline costs and a weaker yen that inflated the price of food imports and may dampen consumer sentiment, which is already showing signs of peaking.

That said, prices of durable leisure goods, such as personal computers and audio-visual equipment, rose 0.1 percent in August from a year earlier, turning positive for the first time since 1992, in a sector where consumer prices have fallen steadily.

The so-called core-core inflation index, which excludes food and energy prices and is similar to the core index used in the United States, fell 0.1 percent in August. That was the same pace of decline as in July and smaller than a 0.2 percent fall in June, an indication that downward price pressure is ebbing.

Economics Minister Akira Amari said it was too early to declare an end to deflation, stressing that wages and prices excluding energy costs had to rise more.

"Japan is in the process of emerging from prolonged deflation," Amari told a news conference on Friday.

"An exit from deflation will become distant if we're seeing cost-push inflation, where wages aren't catching up with rising prices," he said.

The Bank of Japan has expressed confidence that prices will continue to rise and approach its 2 percent inflation target as robust personal spending allows more companies to pass rising costs on to consumers.

WAGES KEY

Still, Amari said the government can declare an end to deflation only when core-core consumer inflation turns positive and there is enough evidence it will stay that way, void of any sudden shocks to the economy.

Some analysts expect core consumer inflation to exceed 1 percent by the end of this year mostly on rising energy and food prices. That may weigh on personal consumption, which would also feel the pain from an expected sales tax hike in April.

"The rise in prices of daily necessities is negative for household sentiment and consumption," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute in Tokyo.

"Companies may raise monthly salaries slightly if the economy remains in good shape. But that won't be enough to offset the decline in real household income next year."

Japan's economy expanded for three straight quarters in April-June, outpacing many G7 nations, as Prime Minister Shinzo Abe's pro-growth policies bolstered household spending and drove down the yen, benefiting exports.

The BOJ also offered an intense burst of stimulus in April, pledging to double the base money via aggressive asset purchases to achieve its 2 percent inflation target in two years.

While central bankers welcome recent rises in consumer prices, they say wages need to start increasing for the economy to keep recovering and achieve a sustained exit from deflation.

Consumer confidence fell in August for a third straight month, a government survey showed earlier this month, while 87 percent of respondents said they expect prices to rise a year from now.

Companies are increasing summer bonuses and hiring more employees but remain hesitant to raise regular pay, despite calls from Abe to do so in cooperation with his reflationary policies.

Abe is expected to decide on raising the sales tax from next year and make an announcement on Tuesday, after the release of the BOJ's closely watched "tankan" business sentiment survey.

To ease the pain from the tax hike, the government is likely to announce a stimulus package that will include tax breaks for companies that increase wages or capital expenditure.

Amari said that while the government cannot force companies to raise wages, it will continue to meet business and labor union executives to seek their cooperation.

(Additional reporting by Stanley White; Editing by Eric Meijer)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (1)
nose2066 wrote:
So it’s good news when prices go up, but family incomes are stagnant, at best?

Sep 26, 2013 9:28pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.