Economists hopeful about Japan’s inflation outlook

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Some mixed readings on inflation and a drop in household spending in Japan have taken some of the shine off solid industrial production and unemployment numbers, and drawn a range of reactions from economists.

Data showed inflation in February was stronger than economists had expected, but the headline and so-called core-core (which strips out fresh food and energy prices) measures retreated from the previous month.

The annual pace of industrial production jumped by 6.6 per cent in February, up from revised growth of 1.4 per cent the previous month, but was softer than the 7.2 per cent expected by economists.

Also disappointing was household spending, which shrank 3.8 per cent year-on-year last month, a steeper decline than January and also compared to market expectations.

The national jobless rate, though, fell to 2.8 per cent, a better outcome than forecast and the lowest level since June 1994.

Marcel Thieliant at Capital Economics took a generally more upbeat view of today’s data, saying the jump in industrial output and a small gain in their preferred measure of “core” household spending “indicate that Japan’s economy continued to record solid growth in the first quarter.”

He continued:

We tend to focus on monthly changes in “core” household spending, which strips out certain expenditure items that do not feed into the national accounts measure of private consumption. This spending gauge edged up by another 0.2% m/m in February following a 3.2% m/m jump in January. Combined with the small increase in retail sales, private consumption therefore continued to recover in February, and risks to our forecast of a 0.3% q/q gain in Q1 have shifted to the upside.

Analysts at DBS were a bit more cautious, but don’t think the numbers should prompt any drastic change to the Bank of Japan’s policy stance:

The lingering of deflation risks, together with the exports-dependent economic recovery, should prompt the BOJ to adopt a cautious attitude on monetary policy. While the BOJ will conduct monthly bond purchases in a flexible manner in response to the development in market conditions, it shouldn’t be in a hurry to exit QE or to raise the yield target. No policy change is anticipated at April’s BOJ meeting.

Yuichiro Nagai and Yukito Funakubo at Barclays said the consumer price index data were “somewhat weak overall”, but the pair are retaining their forecast for national core inflation (which excludes fresh food prices and is what the BoJ is targeting) “to strengthen gradually with an increasing contribution from energy components, while more underlying indicators – the CPI excluding non-alcohol food and energy (core-core) and the CPI excluding food and energy (“BoJ core”) – remain sluggish.”

Barclays said indicators of labour supply and demand continued to improve, thanks to a job shortage being driven by demographic developments. The analysts added:

Further tightening of labor supply and demand could push up CPI service prices in such areas as general household services and eating out … The decrease in the number of long-term unemployed has been slower than that of unemployed workers as a whole, implying further room for the “work-style reforms” advanced by the government. The alleviation of employment mismatches could boost labor productivity and push up on real wages in the future, suggesting a need for further labor reforms as part of the “third arrow” of Abenomics.

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