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Collapsing oil prices and subdued demand have again thrown Japan to the brink of deflation, despite the world’s biggest monetary stimulus programme.

In a serious threat to Abenomics, core consumer price inflation, excluding food and last year’s sales tax rise, fell to a year-on-year reading of zero in February. It is the first time inflation has hit zero since May 2013.

Although the fall in oil prices will make consumers better off and boost demand, it could also undermine the huge Bank of Japan stimulus, which relies on persuading investors that prices will rise in the future.

BoJ officials are watching the slide in prices closely, but after boosting their stimulus last October, they are only likely to ease further if they think that public expectations of future inflation are starting to fall.

Japan’s central bank, on a mission to banish entrenched deflation, has been buying assets for the past two years, promising to double the country’s monetary base. Last October’s “double bazooka” accelerated purchases to Y80tn a year.

Haruhiko Kuroda, Bank of Japan governor, this month acknowledged that his original promise to hit 2 per cent inflation within two years from April 2013 had come unstuck.

While that brought the BoJ’s public comments into line with common wisdom, it emphasises the gap between target and reality in a way that could undermine public belief in the programme.

The advance inflation reading for the Tokyo area in March stayed positive at 0.2 per cent year-on-year, suggesting Japan will not dip into deflation next month, but it could still happen by summer.

“Electricity and gas charges are expected to start declining from April onwards, putting larger downward pressures on the core CPI inflation rate going forward,” noted analysts at Credit Suisse in Tokyo.

But there was more positive news from the labour market, with a decline in the unemployment rate from 3.6 per cent to 3.5 per cent, and an uptick in the ratio of job offers to applicants from 1.14 to 1.15 times.

The steady tightening of Japan’s labour market is the best hope for future inflation, as it will generate upward pressure on inflation if companies have to fight to hire workers.

Prime minister Shinzo Abe has been trying to get corporations to lift wages and in January basic pay grew at its fastest pace for 15 years. This month companies such as Toyota, Nissan and Hitachi also agreed to the biggest pay increase in more than a decade.

Japanese markets shrugged off the inflation data. The Nikkei 225 fell 0.1 per cent in Tokyo, a subdued start but in line with risk-off mood around global markets. The Japanese yen was flat, at 119.2 per dollar.

Stocks have nevertheless been hitting 15-year highs this month, in part because analysts think the BoJ will offer more stimulus to stamp out “the deflationary mindset”.

Japan’s economy is slowly regaining momentum after the sales tax rise from 5 per cent to 8 per cent last April hit consumer confidence and held back spending.

Copyright The Financial Times Limited 2017. All rights reserved.
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