Inflation in Japan may have stalled for the time being

Consumer prices in Japan rose 3.6% in June from a year earlier, beating an expected 3.5% increase but slower than the prior month’s 3.7% jump. Surging food and utility prices distorted the headline figure, thus it’s useful to look at inflation when these prices are taken out. Excluding food prices, CPI rose 3.3% y/y (exp. 3.3%), and excluding food and energy prices, CPI jumped 2.3% y/y (exp. 2.3%).

However, even these figures are misleading because of the recent hike in the sales tax to 8% from 5%. The BoJ estimated that the increase in the tax added around 2% to core inflation in May, thus real core inflation in June may be around 1.3%, although this likely still overestimates the pace of inflation in the real economy due to the higher price of utilities.

Source: FOREX.com, Bloomberg (*impact of the sales tax was estimated to be 2% in May)

Export demand is a real problem for Tokyo

Yesterday, trade data out of Japan showed that the deficit widened to an unexpectedly large JPY822bn in June, significantly higher than the 642.9bn yen deficit the market was expecting. This was partly due to a surprise, and disappointing for that matter, 2% drop in exports. In fact, exports, or a lack thereof, are a major area of concern for Japan. The failure of international trade to relieve pressure on the economy jeopardises Abe’s growth plans. While the slack performance of imports can partly be explained by Japan’s need to import all of its energy and the weaker yen making these imports more expensive, the same fall in the exchange rate should be propping up exports, especially for a historical export power like Japan, but its not.

Inflation to continue to slow in Japan

Overall, while headway is being made with inflation, the lack of activity in the real economy could weigh on consumer prices in coming quarters. As well as the lack of export demand, Japanese businesses aren’t really getting behind Tokyo’s growth plan – there has been no real increase in incomes in Japan – and consumption is slow, all of which is expected to weigh on inflation.