Japan Inflation Goes Negative on Government Travel Discounts

(Bloomberg) -- Japan’s key inflation gauge went negative again last month, driven down by government discounts meant to boost consumer spending and help the pandemic-hit travel industry.

Consumer prices excluding fresh food fell 0.4% in August from a year earlier, falling back into negative territory again after two flat months, the ministry of internal affairs reported Friday in a result matching the median private sector forecast. A 32% drop in the cost of hotel accommodations accounted for most of the overall drop.

The Bank of Japan has been fighting a long battle to stoke price momentum, but Governor Haruhiko Kuroda said Thursday he isn’t overly concerned by temporary price impacts from the government’s stimulus measures. The BOJ won’t hesitate to ease further, he said, if factors in the labor market also start to weigh on inflation.

Key Insights

• The government’s “Go-To-Travel” discounts have added downward pressure on prices that were already weak amid the pandemic and soft energy markets. The situation is likely to get even worse next quarter when economists see core CPI falling by an average of 0.6% after the index loses the upward support of a tax hike a year ago.
• For now, the Bank of Japan is placing the priority on making sure companies have access to credit amid the crisis. Calls for lower cell phone fees from Japan’s new prime minister, Yoshihide Suga, also suggest he’s less concerned about inflation than his predecessor, Shinzo Abe.
• Economist Takeshi Minami at Norinchukin Research Institute said the pandemic has pushed down prices everywhere, not just in Japan, and global central banks have no choice but to keep ultra-easy policies in place for the foreseeable future.
• “In terms of prices, the global consensus including the U.S. is just to persistently continue easing,” Minami said. “Given the coronavirus crisis there’s nothing else you can do.”

What Bloomberg’s Economist Says

“Looking ahead, downside risks to inflation are high. Another wave of virus infections could damp economic activity -- undermining price pressures... In our view, Japan has not fallen back into a deflationary trend, but the BOJ’s fight to reach 2% inflation will probably still be going when Governor Haruhiko Kuroda’s second term ends in early 2023.”

--Yuki Masujima, economist

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• Excluding the impact of the Go-To-Travel campaign, core inflation was flat compared with the previous year, the ministry said.
• Inflation excluding energy and fresh food fell 0.1%, matching the analysts’ projection. So-called core-core inflation hasn’t been this low since March 2017.
• Overall prices climbed 0.2%, also the same as forecast.

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