Japan’s inflation edges up but remains far from BoJ’s target

Job seekers look at their smartphones during a job fair held for fresh graduates in Tokyo. — Reuters pic
Job seekers look at their smartphones during a job fair held for fresh graduates in Tokyo. — Reuters pic

TOKYO, June 30 — Japan’s core consumer prices crept higher for a fifth straight month, but their slow rise means inflation remains far from the Bank of Japan’s 2 per cent target.

Highlights of Data Consumer prices excluding fresh food advanced 0.4 per cent in May from a year earlier, the fastest gain since December 2014, when the impact of a 2014 sales-tax hike is excluded (estimate 0.4 per cent).

Excluding fresh food and energy, prices were unchanged at 0.0 per cent (estimate 0.1 per cent).

The  unemployment rate in May rose to 3.1 per cent (estimate 2.8 per cent) even as the number of people in work touched the highest level since 2007 and the  job-to-applicant ratio increased to 1.49.  Industrial production decreased 3.3 per cent in May from the previous month (estimate -3.0 per cent).

Key takeaways

The BOJ is betting that a growing economy and the tightest labour market in decades will eventually fuel acceleration in wage gains and inflation. 

So far pay has risen only modestly, and the key inflation gauge has only turned positive since January.

The question is how low unemployment must fall to fuel bigger pay increases and stronger inflation.

For now, the BOJ’s forecast of 1.4 per cent core inflation for the 2017 fiscal year is seen as optimistic by private economists, who forecast it at half that level. Some expect the BOJ to revise the figure when it issues its quarterly outlook report in July.

Economist views

The rise in unemployment is temporary and due to more people starting to look for work, according to Takeshi Minami, chief economist at Norinchukin Research Institute. “Labour participation may be peaking due to supply shortage, which should push up wages and prices,” Minami said.

“It hasn’t occurred at all yet, but I do think we are getting there soon,” said Minami, who sees a chance core CPI will rise toward 1 per cent later this year.

“I doubt companies will raise wages when the outlook and the growth potential rate aren’t picking up,” said Hiroshi Hanada, the head of economic research at Sumitomo Mitsui Trust Bank.

It’s a robust production result, once you strip out the effects of the Golden Week holidays and the reaction to the large rise in April, said Takuji Aida, chief economist at Societe General SA in Tokyo. 

Aida sees output growing 2.1 per cent over the second quarter, which would be five straight quarters of expansion.

Other details

Household spending fell 0.1 per cent in May from a year ago (estimate -0.7 per cent). Tokyo consumer prices excluding fresh food, a leading indicator of national prices, were unchanged at 0.0 per cent in June from a year earlier (estimate 0.2 per cent). Overall nationwide prices rose 0.4 per cent in May (estimate 0.5 per cent).

The decline in production in May from April was mostly due to the transport industry, with some car plants closed in early May for national holidays, according to the economy ministry.  Overall output is forecast to rise 2.8 per cent in June from May, and then drop slightly in July.

Industrial production rose 6.8 per cent from a year ago (estimate 6.9 per cent). The labour-force participation rate increased to 60.8 per cent, the highest since 2008. — Bloomberg