Japan CPI falls again as households cut spending despite BOJ plans
Japan saw its sixth consecutive month of falling core consumer prices in the year to August, which poses a challenge for the Bank of Japan’s relaunched stimulus campaign..
Household spending fell 4.6% year-on-year during the month, which almost doubled the 2.5% fall expected by economists.
Private consumption in Japan makes up two-thirds of the economy and the decline in the index shows its growing weakness.
The headline consumer price index fell 0.5% year-on-year in August, declining from July’s 0.4 per cent drop, but matched economists’ expectations. The previous month which was the biggest drop since March 2013, a month before the central bank embarked on massive monetary stimulus.
The core-core inflation index, which excludes food and energy prices and is similar to the core index used in the US, rose 0.2% in the year to August (consensus: 0.2%), the slowest since September 2013.
Excluding just fresh food prices, the BoJ's preferred gauge of prices, CPI was down 0.5% year-on-year (consensus: -0.4%).
"Output and private consumption are in a gradual pickup, but what's worrying is the slowdown in consumer inflation excluding both food and energy," said director of economic research at NLI Research Institute Taro Saito.
This decline of consumer spending may lead to further scrutiny from the central bank, which recently started targeting short and long term interest rates instead of increasing base money at an annual pace of 80trn yen ($789bn).
The bank is also pushing Prime Minister Shinzo Abe’s government to pick up the slack by implementing vigorous economic growth plans and structural reforms on top of its 28trn yen stimulus package that is set to roll out later this year.
"If the price trend persists, the BOJ can no longer blame oil prices for weakening inflation and it would be forced into further easing, even though the chance of immediate action is slim," said Saito.
Despite three and a half years of quantitative easing by the BOJ, weak household spending and a strong yen weighing on import costs have kept inflation well away from the central bank’s 2% goal.
The tight job market has also not helped the situation with many firms wary of boosting wages for fear of raising fixed costs, which is making households reluctant to spend. The jobless rate was 3.1% in August after a 21-year low in the previous month.
Separate data from the trade ministry however showed that factory output rose 1.5% in August, which surpassed economist’s expectations at 0.5%. This was led by domestic demand for liquid crystal displays for computers and car navigation systems according to officials.
The economy’s growth rate slowed to an annualised pace of 0.7% over April to June, compared to the previous quarter’s growth, which was led by leap year effects.