Japanese inflation slowed again in December, official data showed yesterday, as weak consumer spending and falling energy prices challenge Tokyo’s war on deflation, hiking pressure on the Bank of Japan to unleash more stimulus.
But an uptick in factory output suggests that the world’s number-three economy may be crawling out of recession, analysts said, as the unemployment rate hit a 17-year low.
The mixed bag of economic data published yesterday morning showed core consumer inflation slowed for a fifth straight month, while the internal affairs ministry reported that spending among Japanese households fell a greater-than-expected 3.4% from a year ago, as a sales tax hike weighed on shopping nationwide.
Inflation is a key measure for Tokyo’s bid to end years of stagnant or falling prices that have been blamed for holding back growth and denting firms’ expansion plans.
Prices were on the rise, largely due to Japan’s heavy post-Fukushima energy bills, but oil rates have tumbled in recent months and consumers snapped their wallets shut after the government raised sales taxes to 8% from 5% last year.
The economy quickly fell into recession, prompting Prime Minister Shinzo Abe to put off a second sales tax hike this year, which was aimed at taming Japan’s enormous national debt.
The figures yesterday showed the inflation rate last month was at 2.5%, down from 2.7% in November. Adjusted for the tax hike, the rate rose just 0.5% from a year earlier, well short of the Bank of Japan’s 2.0% inflation goal which it hopes to reach around the fiscal year ending in April next year.
Earlier this month the central bank slashed its inflation outlook as plunging oil prices make the target look increasingly out of reach. The move boosted speculation that the BoJ would have to further expand its already huge monetary easing programme to counter the downturn.
“Inflation is still likely to moderate further,” Marcel Thieliant from Capital Economics said in a commentary.
“Less than half of the plunge in the price of crude oil has been passed on to consumers in the form of lower gasoline prices so far.”
Japan’s central bank now expects inflation for the fiscal year starting in April to come in at 1%, well down from an earlier 1.7% forecast and the BoJ’s own ambitious target.
“The BoJ is expected to go ahead with additional easing in April at the latest,” SMBC Nikko Securities said.
“Prices are likely to return to deflation by early spring and it is highly possible that the bank will fail to achieve the fiscal 2015 (inflation) outlook.
“If the BoJ leaves that unaddressed, it will be called into question how serious it is about raising prices.”
Taking office in late 2012, premier Abe launched a growth blitz dubbed Abenomics, which meshes government spending with massive monetary easing by the central bank and reforms to the highly regulated economy.
The plan bore fruit in the beginning, but the more recent slowdown has raised the stakes as the conservative leader struggles to contain Japan’s finances - the country has one of the world’s biggest debt burdens – while dragging the economy out of a years-long slump.
Last month, revised figures showed that Japan’s economy shrank 0.5% in the July-September quarter, marking the second consecutive contraction.
Fourth-quarter GDP figures are due on February 16.
In some more upbeat news yesterday, industrial production in December rose 1% on-month, slightly below market expectations, but reversing a surprise drop in November.
The jobless rate edged down to 3.4% from 3.5% a month earlier, hitting its lowest level since mid-1997.
“The rebound in industrial production in December confirms that the economy started to recover last quarter,” said Thieliant from Capital Economics.
“The labour market (also) continues to tighten... However, there is no evidence that a tighter labour market has strengthened price pressure.”