Japan inflation expectations wilting once again

September 9, 2015

Not againThe biggest attention grabber out of Japan is today’s 7.7% moonshot on the stock market, based on hopes of further central bank stimulus in Asia as well as an expected corporation tax cut over the next few years. Never mind that this comes just one day after the Nikkei joined many other major global stock indexes in wiping out its gains for the year.

The economic news, unfortunately, is still moving in the opposite direction, particularly on what Abenomics, and so much of Japanese economic policy over decades has attempted to achieve: make inflation rise.

The latest consumer confidence index published by the Cabinet Office makes for some very uncomfortable reading for anyone optimistic about seeing tangible results from the extraordinary measures the Bank of Japan and the government authorities have resorted to in trying to get the world’s third largest economy to steer clear of deflation.

The proportion of households who expect no inflation in the coming year rose to 9 percent, the highest since June 2014. And the proportion expecting deflation, while only 3.9 percent, rose to a 5-month high.

Those expecting inflation to rise by less than 2 percent rose sharply to 24.4 percent, the highest since April 2013. This was before Abenomics was launched to much fanfare and what was to become an historic rally in the Tokyo stock market.

So just under 84 percent of Japanese households expect price rises, the lowest since June last year and down just over 2 percentage points in a month. 

Japan inflation expecations

Those expecting inflation to rise 2 percent or more but less than 5 percent slipped to 36.4 percent, where it was in January. You have to go back to July 2013 to find fewer people expecting price rises of that magnitude.

None of these figures are definitive of course – and are subject to a fair amount of error. They aren’t terribly surprising either given that the economy shrank in the latest quarter, in part because of still-sluggish consumer spending.

But they follow alarming news that core consumer inflation stalled for the first time in more than two years in July, coinciding with a drop in consumer spending. 

Japan core CPI

Inflation expectations are what the Bank of Japan ultimately want to control, and they are moving in the wrong direction.

Given how aggressive Abenomics already has been – not to mention a recent failed attempt to artificially boost inflation by jacking up sales taxes – it does raise the question whether more of the same is the right medicine.

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