Japan: inflation drops below 1%.
Published 1 December 2014
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This article is no longer current. Please refer to Overseas Business Risk – Japan
Summary
Driven by falling energy prices, real inflation has fallen below 1% for the first time since October 2013. Continued sluggish consumption after the April VAT increase compounds softening prices. Unemployment rate improves to 3.5% but this has not helped consumption as real wages continue to fall. Latest drop in oil prices and OPEC announcement will make BOJ’s task even harder.
Detail
CPI inflation falls below 1% for the first time in a year
Japan’s core CPI (excluding fresh food) increased 2.9% compared to a year ago (YOY) in October (3.0% YOY in September). This was the 17th consecutive monthly increase and in line with market consensus expectations. Without the April VAT increase impact, it would have been 0.9% YOY, which was the lowest increase since October 2013.
The weakening positive impact from energy prices amid falling oil prices contributed to the slowdown in inflation. November preliminary core CPI for the Tokyo-area, a leading indicator for nationwide CPI, narrowed its increasing margin from 2.6% YOY to 2.4% YOY.
Household expenditure declines for 7 months in a row after the April VAT increase
October household expenditure (including both working and non-working households) fell 4.0% YOY (-5.6% YOY in September) in real terms (i.e. adjusted by inflation). This was the seventh consecutive monthly decline. Big-ticket items such as durable goods, housing reforms, and leisure spending (e.g. domestic travel and golfing) remained weak. Working households spent 3.4% less than a year ago.
Falling real household income (for 13 consecutive months) continues to discourage domestic expenditure.
However, October retail sales rose 1.4% YOY, 2.3% in September [in nominal terms]. Weak car and household appliance sales were offset by firm sales in clothing and foods.
Unemployment rate improves to 3.5%
October unemployment fell to 3.5% (3.6% in September). This was slightly better than estimated (3.6%) as improved conditions for female labour reduced female unemployment by 0.2% to 3.2%, while male unemployment edged up by 0.1% point to 3.8%. The number of non-regular workers, whose wages tend to be lower, increased more than that of regular workers (160,000 YOY gain vs. 70,000 YOY gain).
Industrial production slightly improves
October industrial production rose 0.2% compared to the previous month (MOM). This was the second consecutive monthly gain and stronger than market consensus (-0.6% MOM). Strength was observed in such industries as electronic devices while production in transportation equipment and information telecommunications were weak. A manufacturing production survey found that manufacturers were expecting gains in November and December.
Comment
The sharp fall in oil prices (reaching the lowest prices in four and a half years overnight in NY) responding to the OPEC decision not to cut their oil supply, boosted market sentiment today in Tokyo, resulting in 1.2% rise in Nikkei. This was driven up by shares in transportation names due to expected lower energy input costs.
Due to the weaker yen, most energy suppliers will increase their utility prices in January following reductions in December. This reflects the impact of the recent Yen depreciation on yen-based energy import costs, which was greater than that of falling energy prices. However, the pace of more recent oil price drops is higher than that of the falling Yen. If this trend continues, then consequential cheaper energy bills could ease burdens on household finance. However, further falls in oil prices would be a double-edged sword for Japan’s economy. While they might help domestic consumption and improve the trade deficit, declining oil prices make the BOJ’s inflation target much harder to achieve and could reduce pressure to restart nuclear reactors.
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