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March 29, 2013 2:38 am
The challenge facing Japan’s new leadership in escaping from economic stagnation and deflation was underscored on Friday as data showed further declines in consumer prices and an unexpected contraction in factory output.
Haruhiko Kuroda, the new governor of the Bank of Japan, could struggle to reach his goal of generating 2 per cent inflation in two years, analysts said, after the government data indicated core consumer prices fell 0.3 per cent in February compared with a year earlier.
It was the fourth consecutive month of decline in core CPI, which excludes prices of fresh food. The fall came in spite of a more than 15 per cent decrease in the value of the yen, which has pushed up prices for many items sourced outside Japan, from petrol to package holidays.
“We believe the BoJ’s 2 per cent target is still a long way off,” said Chiwoong Lee, an analyst at Goldman Sachs, adding that it would take time before the impact of the weaker yen was felt on prices in general, rather than merely imports.
Mr Kuroda, a proponent of aggressive monetary easing, will lead his first BoJ policy-setting meeting next week following his appointment by Shinzo Abe, the prime minister. Mr Abe was elected in December on a pledge to revive an economy that has managed to grow about 0.5 per cent a year on average since the mid-1990s.
The BoJ’s board is expected to agree to pump more money into the economy by expanding its purchases of government bonds and other assets. Market expectations are high: the yield on 20-year bonds dropped to its lowest in 10 years this week after Mr Kuroda repeated a pledge to consider buying longer-dated debt.
The central bank’s ultimate aim is not simply to raise prices but to spur corresponding increases in corporate investment and wages. But the decline in industrial production in February was a reminder of the entrenched defensive mood at many companies: output was down 0.1 per cent, against analysts’ average forecast of a 2.5 per cent rise.
The result suggested that economic growth in the first quarter could be less buoyant than analysts have expected. Barclays Capital cut its forecast for growth in gross domestic product to 0.3 per cent, or 1.1 per cent on an annualised basis, from 0.5 per cent. JPMorgan said its estimate of 3 per cent annualised was under review and “the risk clearly skews to the downside”.
Still, Masamichi Adachi, a JPMorgan analyst, said he believed Japan would continue its rebound from a recession last year as the effect of BoJ easing, government stimulus spending and reviving overseas demand for Japanese goods became fully apparent beginning in the second quarter.
The FT explains the state of the Japanese economy and outlines the key principles of Abenomics, the economic policy of Prime Minister Shinzo Abe
The industrial production data nonetheless highlighted the challenge of turning the rise in optimism that has accompanied Mr Abe’s policy moves into progress in the real economy. Factory managers who responded to the previous month’s survey had said they believed February output would soar by 5.3 per cent.
This time round, they predicted rises of 1 per cent in March and 0.6 per cent in April.
Unemployment also rose slightly in February, from 4.2 per cent to 4.3 per cent. But household spending also picked up, by 0.8 per cent compared with a year earlier.
On the prices front, increased import costs in February were more than offset by large declines in prices for flatscreen televisions and other home electronics – a category that is under price pressure worldwide due to changes in technology and manufacturing processes, factors that are beyond the BoJ’s control.
TV prices in Japan fell 29 per cent in February compared with the same month a year earlier.
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