Japan's inflation stays weak despite stimulus measures

Japan's core consumer price index rose 0.7 per cent year-on-year in May, unchanged from April, far off the central bank's 2 per cent target.
Japan's core consumer price index rose 0.7 per cent year-on-year in May, unchanged from April, far off the central bank's 2 per cent target.PHOTO: AGENCE FRANCE-PRESSE

TOKYO • Japan's core inflation remained subdued in May, yet again highlighting how far off the central bank is in hitting its 2 per cent price goal despite over five years of massive stimulus.

The stubbornly weak inflation is another reason why the Bank of Japan (BOJ) is expected to take some time before exiting its ultra-easy money policy, even as the US Federal Reserve and the European Central Bank are far down the road in rolling back crisis-era policies.

The core consumer price index, which includes oil products but excludes volatile fresh food prices, rose 0.7 per cent year-on-year in May, unchanged from April, and matching economists' median estimate, Ministry of Internal Affairs and Communications data showed yesterday.

The data came after the central bank a week ago cut its inflation assessment, meaning that the BOJ will be in no hurry to begin tapering its massive stimulus programme.

"The BOJ has had little success in lifting inflation expectations among households and firms," said Mr Marcel Thieliant, senior Japan economist at Capital Economics.

"The upshot is that monetary policy tightening remains a long way off."

Japan's economy is expected to rebound in the second quarter from a contraction in the first quarter that ended the longest growth streak since the 1980s bubble economy. But risks to Japan's outlook abound, not least from a heated China-US trade spat that has roiled financial markets.

A private survey yesterday showed that Japanese manufacturing activity expanded in June at a faster pace than the previous month but export orders contracted for the first time in almost two years in a warning sign about overseas demand.

The BOJ's nine-member board is expected to scrutinise why Japanese inflation remains stubbornly subdued, when it meets next month to conduct a quarterly review of its long-term growth and price projections.

BOJ board member Yukitoshi Funo said on Thursday that he saw recent weak inflation as temporary, but added that structural factors such as the advance of Internet shopping and stiff competition among mass-merchandise retailers are weighing on prices.

Given the continued tepid inflation, analysts said the central bank will be keenly analysing near-term and structural factors that are influencing prices.

"The BOJ is in a bind. If it stresses structural factors too much, that may be seen as a sign that it could adjust interest rates even before inflation rises substantially, which would cause the yen to rise, pushing down prices again," said chief rates strategist Chotaro Morita at SMBC Nikko Securities.

Some economists have said the BOJ should make its 2 per cent inflation target a more flexible and longer-term objective, rather than persisting in trying to achieve it.

Still, chances of the BOJ ditching the target altogether are seen as low given the risk of a return of a strong yen because the price goal is shared among major central banks.


A version of this article appeared in the print edition of The Straits Times on June 23, 2018, with the headline 'Japan's inflation stays weak despite stimulus measures'. Subscribe