Japan's inflation ticks up, but spending still weak

Shoppers choosing vegetables at a fruit and vegetable store in Tokyo on May 1, 2015. -- PHOTO: AFP 
Shoppers choosing vegetables at a fruit and vegetable store in Tokyo on May 1, 2015. -- PHOTO: AFP 

TOKYO (AFP) - Japanese inflation picked up in March for the first time in 10 months, data showed on Friday, but household spending tumbled in a worrying sign for consumer confidence.

Core inflation, excluding volatile fresh food prices, hit 2.2 per cent year-on-year, accelerating from the previous month for the first time since May 2014, and offering a sliver of hope for Tokyo's war on deflation.

However, stripping out the impact of a sales tax rise last year, the rate was a tepid 0.2 per cent, well short of the central bank's 2.0 per cent target.

Analysts say central bank policymakers will almost certainly be forced to expand its monetary easing scheme to jack up prices and counter a downturn in the world's number three economy.

Sustained inflation is a cornerstone of Prime Minister Shinzo Abe's drive to conquer stagnant or falling prices and revive growth.

"Inflation is still close to zero and could drop in the coming months," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"The reading was a little bit positive, but worries (for the Bank of Japan) have not disappeared."

Separate figures showed household spending in March dropped almost 11 per cent, the worst on record since comparable data started in 2001 and steeper than an 8.2 per cent on-year decline in March 2011, when Japan was hammered by a quake-tsunami disaster and nuclear crisis.

On Thursday, the BoJ conceded the original timeline for hitting its price target would be missed, as it cut its growth and inflation forecasts.

Japan's gross domestic product will expand 2.0 per cent in the year to March 2016, while the inflation rate is seen at 0.8 per cent, the BoJ said in a semi-annual report. That compares with a previous estimate of 2.1 per cent and 1.0 per cent respectively.

- Tepid spending -

The report - which followed a meeting where policymakers held fire on fresh stimulus - pushed back an already murky timeline for hitting the bank's inflation target to the first half of fiscal 2016, which runs from April through September next year.

The ambitious goal was originally supposed to have been achieved around two years after the launch of the BoJ's stimulus in April 2013.

But the bank has, over time, loosened that timeline as the data suggested it was unattainable.

Weighed by a plunge in oil prices and tepid consumer spending, Japanese inflation stalled in February for the first time in nearly two years.

"It is true that the timing for achieving the 2.0 per cent inflation target has been delayed," BoJ governor Haruhiko Kuroda told reporters on Thursday.

"But price trends are improving steadily and that is expected to continue. We don't see additional (easing) measures being necessary at this point."

Kuroda has previously acknowledged that falling oil prices hurt efforts to drive inflation, and he warned of the possibility of zero inflation as attempts to reverse of years of deflation proved to be "very challenging".

Consumers tightened their purse strings after Tokyo hiked Japan's sales levy last April and the economy fell into a brief recession. It emerged from the red in the last quarter of 2014.

Also Friday, the internal affairs ministry said the unemployment rate edged down to 3.4 per cent in March from 3.5 per cent in February.

Minami said BoJ policymakers could have decided to offer fresh easing measures on Thursday if they had wanted to act pre-emptively.

"But they argue the basic trend is improving. I think they are betting on a scenario in which higher wages and tightening in the labour market lead to higher prices."

Deflation may sound good for Japanese consumers, but it means people tend to put off buying because they do not expect prices to rise and hope they might even get goods cheaper down the line.

That, in turn, hurts producers and holds back their expansion and hiring plans, which is bad news for the economy.

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