Underlying inflation in Japan has fallen to zero for the first time since 2013 in a blow to prime minister Shinzo Abe's efforts to revive the country's economy.
The so-called “core-core” consumer price index, which excludes volatile energy and food prices, was unchanged on a year ago in September, according to new figures released by the Ministry of Internal Affairs.
Stagnant core prices show that Japan’s inflation slowdown is no longer just a matter of weak commodity prices but has spread across the domestic economy, highlighting how hard it will be for the Bank of Japan to regain momentum.
The central bank is unlikely to panic, however, having capped ten-year bond yields at zero last month as part of a new move to stimulate the economy. The BoJ anticipates that a rebound in commodity prices and stabilisation in the yen will start to push prices up again next year.
Headline inflation was unchanged with a year-on-year fall of 0.5 per cent. However, the fall in energy prices has begun to moderate: they were down 8.4 per cent year on year, compared with 10.2 per cent a month earlier.
There was good news on jobs, with the unemployment rate falling by 0.1 percentage point to 3.0 per cent, and the ratio of job openings-to-applicants rising to its highest level for more than 25 years at 1.38 times.
“Japan’s labour market continues to tighten and fuel faster wage growth. However, Japanese households are not spending their increased income,” said Bill Adams, senior international economist at PNC Financial.
”The Bank of Japan will see vindication for its monetary stimulus in the latest data,” he said, arguing that, in time, a tight labour market “will create inflationary pressures to raise CPI inflation to the Bank of Japan's 2 per cent target”.
Consumption expenditures, excluding housing, were down 0.6 per cent in real terms and 1.1 per cent without adjusting for prices.
The BoJ thinks it is crucial to raise consumer expectations of future inflation so that employees will demand and expect higher wages, creating the fuel for higher consumption and thus a self-fulfilling cycle of price rises.
But in its recent “comprehensive assessment” of the economy, the central bank argued that falling commodity prices have undermined those expectations. Because Japan is so accustomed to stagnant prices after more than two decades of on-and-off deflation, the public tends to look at today's inflation and assume it will continue.
The BoJ's September moves to cap bond yields, along with a promise to overshoot its 2 per cent inflation goal, were meant to prop up public confidence in future price rises. Since that move the yen has weakened, falling below ¥105 on Friday, making it unlikely the central bank will ease policy further when it meets next week.
“We see absolutely no evidence that the BoJ's reckless experiment in monetary easing is delivering on its goal of raising the public's inflation expectations,” said Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo. He said September's new policy framework “has done nothing to change this”.
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