Japan’s Inflation Ticks Up for a Second Month After Tax Hike

(Bloomberg) -- A key gauge of Japan’s price gains ticked up again in November in the wake of an earlier sales tax increase that is propping up the headline figure, complicating the picture of the underlying trend.

Headline figures from the ministry of internal affairs showed consumer prices excluding fresh food rose 0.5% from a year earlier, edging up from 0.4% in October.

After factoring out the impact of the sales tax and free pre-school education, though, core inflation maintained the same pace of just 0.2%, the data showed, highlighting the difficulty the Bank of Japan is facing in lifting price growth toward its 2% target.

Key Insights

• October’s 2 percentage-point increase in the sales tax has pushed up prices of goods and services but also damped consumer demand, a key driver of inflation.
• Businesses are choosing to pass the cost of the higher tax onto shoppers rather than absorb it themselves over the short term, but anemic wage growth is still the main hurdle to long-term price gains, according to economist Hiromichi Shirakawa at Credit Suisse. Unless income expectations rise, consumption won’t increase sustainably and businesses won’t be able to raise prices, he said.
• Still, inflation has held up somewhat better when the impact of lower energy costs is stripped out. That fact has helped the BOJ argue that much of the deflationary pressure being felt in Japan is actually coming from abroad, and that domestic price momentum hasn’t been lost, despite running so far below the bank’s target.
• The BOJ on Thursday held pat and most economists expect no action for the foreseeable future. A government stimulus package unveiled this month and signs of progress in U.S.-China trade talks have opened some breathing room for the bank, which is reluctant to ease further because its policy ammunition is already depleted.

What Bloomberg’s Economist Says

“The broad picture in Japan is low and slowing inflation. Even so, reflation still appears to be on track given the positive output gap – which is now part of the BOJ’s forward guidance.”

--The Asia Economist Team

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• Excluding fresh food and energy, prices rose 0.8% in November. Economists forecast 0.7%.
• Overall inflation rose 0.5%, matching the median analysts’ forecast.

To contact the reporter on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jason Clenfield, Paul Jackson

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