Japan price rise offers hope for deflation end

TOKYO: Prices rose in Japan last month at their fastest pace for almost five years, data showed, offering hope for ending years of debilitating deflation that has stymied growth.
The consumer price index, which measures a basket of everyday goods, but excludes the volatile cost of fresh food, was up 0.7 percent from a year earlier, the biggest rise since a 1.0 percent increase in November 2008.
The headline figure is good news for Prime Minister Shinzo Abe, who has promised he will drag Japan out of its 15-year funk, lifting prices and wages to get the economy moving again.
It is the second straight month of increases after a 0.4 percent rise in June, which marked the first gain in 14 months, according to the internal affairs ministry.
Although ever-reducing prices are good news for individual shoppers, they are bad for the economy as a whole because they encourage consumers to put off spending, knowing they will pay less for a product if they wait.
That makes it difficult for companies to invest and discourages them from giving wage rises, which, in turn, reduces consumer spending further.
Any sustained increase in prices should be welcomed by the government.
However a closer look at the data reveals the battle against falling prices is far from won.
Household spending in July rose a marginal 0.1 percent on year, with disposable income at wage-earning households up 0.4 percent.
The price increases in the past two months have largely represented “cost-push” inflation, driven by high global energy prices as well as a weaker yen that has made imports more expensive, said Norinchukin Research Institute chief economist Takeshi Minami.
“It’s a key for Japan whether we can smoothly shift from cost-push to demand-pull type of inflation,” Minami said.
Hideo Kumano, chief economist at Dai-ichi Life Research Institute, agreed, adding: “Today’s CPI data shows signs of exit from deflation, but we still need to see improvement in the job market and redistribution of wealth... to declare deflation is over.
“The definition of exit from deflation can be political, but the key is ‘sustainable’ rises in prices, which is difficult to achieve without improvement in the job market and salaries,” Kumano said.
Unemployment squeaked lower to 3.8 percent in July — its lowest since October 2008 — from 3.9 percent in June.
Separately the economy and industry ministry said factory output rose 3.2 percent in July from June, reversing a revised fall of 3.1 percent in the previous month.
The latest factory output numbers are “good if we consider exports, which weren’t that favorable during the month,” said Norinchukin’s Minami. “It shows the economic recovery remains intact,” he told Dow Jones Newswires.
Mizuho Securities Research and Consulting senior economist Norio Miyagawa said higher prices were “further proof that the Japanese economy is solidly recovering. The next challenge is how soon it will start pushing up wages.”

The rises come as Abe considers introducing a sales tax plan next year, which Minami, among other analysts, warns could smother any economic recovery.
The planned rise “will weigh on prices as the move is likely to kill the current positive momentum in prices by damping consumer sentiment,” Minami said.
Japan plans to raise its five-percent sales tax to eight percent in April 2014 and to 10 percent in October 2015 to help tackle mounting public debt as the population ages.
The government is expected to make a final decision as early as September on whether to go ahead with the hike.
Finance Minister Taro Aso said Friday the latest economic data showed a continued recovery in the world’s third largest economy and would positively influence a tax hike decision.