Is Japan Losing Its Battle with Deflation?

The latest Japanese inflation numbers are in and it ain’t lookin’ pretty! Both the Tokyo and national core CPI readings fell short of expectations, reviving calls for additional stimulus from the Bank of Japan.

The August inflation report showed that the national core CPI is down from 3.3% to 3.1% instead of just dipping to 3.2% while the Tokyo core CPI fell from 2.7% to 2.6% instead of holding steady. Removing the impact of the April sales tax hike on price levels reveals that Japan’s core CPI is just at 1.1%, miles away from the central bank’s 2% target.

Components of the report indicated that price increases were led by higher costs in accommodations, air conditioners and summer clothing – all suggesting that seasonal factors were responsible for keeping inflation afloat. Meanwhile, gasoline prices chalked up a sharp monthly decline, along with consumer electronics.

With the temporary effects of the sales tax hike expected to keep fading in the coming months, inflationary pressures are also likely to subside. This means that BOJ Governor Kuroda and his men will have no choice but to face those nasty deflationary demons again sooner or later!

Implementing another tax hike doesn’t seem to be a viable option, as this might weigh further on Japan’s already feeble economic performance. As it is, the economy has been unable to get back up on its feet, as spending and production took a huge hit after the consumption tax was increased from 5% to 8% earlier this year. Hmm, I wonder what might be an efficient way to stimulate both growth and inflation…

If you’ve answered “quantitative easing”, then we’re definitely on the same page, along with several economic analysts. Former BOJ official Hiromichi Shirakawa estimated that price levels will continue to fall and that the BOJ might add stimulus early next year. Some have even predicted that the weak inflation readings could force the BOJ to lay down its easing plans as early as their next policy meeting in October!

Although there’s no denying that the BOJ needs to boost stimulus at some point, it’s still a question of when BOJ Kuroda would drop his optimistic front and finally admit that the economy is very weak. In his latest testimony, he reiterated that policymakers believe that price pressures will pick up later on due to improvements in the labor market and strong wage growth. For now, he is also welcoming the recent round of yen weakness in the forex market, which could also keep deflation at bay.