Raymond Van Der Putten
BNP Paribas
As expected, consumer price inflation slowed in August to 3.3% from 3.4% in the previous month. Excluding the direct effect of April’s VAT hike, inflation was around 1.1%. The decline has questioned whether the BoJ’s 2% target is achievable. We forecast that this objective could be reached in early 2016.
As expected, consumer price inflation slowed in August to 3.3% from 3.4% in the previous month. Excluding fresh food, the BoJ’s preferred indicator, the deceleration was even more pronounced: 3.1% after 3.4% in July. This was mainly due to slowing energy prices as the effect of the yen depreciation is waning. Excluding the direct effect of April’s VAT hike, inflation amounted to around 1.1%, well below the BoJ’s 2% target.
Some have attributed this deceleration to the softening of growth after the VAT hike in April. However, there is not much evidence that this has a lasting effect. On the contrary, the Economy Watchers report that its effect has been waning. This is also confirmed by retail sales. In July, retail sales rose 0.5 percent from a year earlier, up for the first time in four months. August sales have reportedly been sluggish, but this may be largely blamed on bad weather.
The rapid disappearance of the negative impact of the VAT hike would support the government’s intention to hike the consumption tax rate again in October 2015, from 8% to 10%. This is part of the government’s pledge to erase the primary deficit by 2020.
The decline in inflation has questioned whether the BoJ’s 2% inflation target is achievable. According to our projections, the target could be reached in early 2016. As the output gap has virtually disappeared, wages have been rising again. In July, contract wages were 0.5% higher from a year earlier. Wages should gain further momentum in the coming months. Moreover, the yen is expected to depreciate further against the dollar. As inflation expectations rise, retailers might find it easier to pass on higher import prices and production costs to sales prices.
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