TOKYO: Japanese Prime Minister Shinzo Abe’s faltering bid to conquer years of deflation received a fresh blow on Friday as official data showed consumer prices fell for the first time in more than two years.
The decline comes just a day after Abe pledged to refocus on his “Abenomics” growth project, following months of divisive debate over new rules for pacifist Japan’s military.
The 0.1% fall in so-called core inflation - not including volatile fresh food - was the first since April 2013, and underlines Tokyo’s struggles to turn around years of stagnant or falling prices that have weighed on the world’s number three economy.
While lower prices are good for individual shoppers, they are bad for the wider economy because they tempt consumers to put off purchases in the knowledge products will be cheaper in the future.
That, in turn, discourages firms from investing and ultimately pulls down wages. Japan has suffered two decades of stagnant or falling prices.
The consumer price decline in August came after inflation fell to zero in July, as weak domestic demand and plunging energy prices weighed.
Abe’s government on Friday tried to play down the weak inflation reading.
“It is clear what weighed on the data - lower energy prices,” said Akira Amari, state minister in charge of economic revitalisation. “When you exclude energy, consumer prices are on an upward trend. You can read into the data as the index is rising.”
Abe’s drive had appeared to offer the promise of a turnaround, but a slew of recent data suggest it is faltering.
Standard & Poor’s cut its sovereign credit rating on Japan last week, saying the government has little chance of reinvigorating the moribund economy in the short term, with social welfare costs spiralling.
Friday’s data may also stir speculation that the Bank of Japan (BoJ) will be forced to unleash more stimulus to counter the downturn. Japan’s economy contracted in the second quarter, due to a slowdown in China, weak consumer spending at home and slowing exports.
“The drop in prices brings more unpleasant news for the BoJ,” Masamichi Adachi, an economist at JPMorgan Chase and a former BoJ official, told Bloomberg News. “It’s getting harder to defend keeping policy unchanged.”
For more than two years Abe has pushed a huge spending blitz and monetary easing drive - dubbed “Abenomics” - to inject life into the economy.
The central bank’s 80 trillion yen (US$665 billion) annual asset-buying scheme was a key pillar of his policy, but he is struggling to make good on pledges to cut red tape and open up the economy.
The prime minister, however, has insisted he has brought Japan “to a state of almost no longer being in deflation”.
Speaking on Thursday, he said his government will go ahead with raising sales taxes to 10% in 2017.
A sales levy rise to 8% from 5% last year hammered consumer spending and pushed Japan into a brief recession. The hike was aimed at taming Japan’s massive national debt - one of the heaviest burdens among developed economies.
“From this very day, Abenomics is entering the second stage,” Abe told reporters, adding that his long-term goal was to boost the size of Japan’s economy by 20% from its current level.
He offered no specific measures on how he would achieve that goal but said he will focus on women and pensioners.
“Abe is kicking off the campaign for next year’s election,” said Takuji Okubo, chief economist of Japan Macro Advisors.
“Abe is focusing on individual issues that would please women and pensioners, he’s trying to regain popularity” after forcing through the massively unpopular military bills, he said.
Marcel Thieliant from Capital Economics speculated that the BoJ will announce more easing at its end of October meeting.
“A sluggish economic recovery and anaemic wage growth suggest that price pressures are unlikely to strengthen much further form here on,” he said in a commentary. - AFP
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