July 25, 2014, 11.00 JST

No sign of a return to deflation after the VAT hike

 Source: MIAC, JMA.

The consumer price in Japan seems to be maintaining a moderate rising trend. The nationwide CPI excluding fresh food, the official target for the Bank of Japan, rose by 3.3% year on year in June. It is a slight deceleration from the 3.4% inflation in May, but a mere 0.1% point deceleration is hardly an evidence of a new trend yet. After seasonally adjustment, the same CPI measure is reported to have risen by 0.2% between May and June, showing a continuing presence of an inflationary trend.

We can also observe an inflationary trend in the core CPI measure. The nationwide core CPI excluding food and energy rose by 2.3% year on year in June, slightly accelerating from 2.2% in May. On the whole, we see a moderate inflationary trend continuing in Japan. 

The advance CPI inflation report for Tokyo area for July also shows that the stable inflation environment remained unchanged. In July, Tokyo CPI inflation excluding fresh food remained unchanged from June at 2.8% YoY.  

Near term inflation outlook

Government officials including those from BoJ tend to maintain that Japan is close to finishing its transition from deflation to low and stable inflation. Indeed, the latest CPI data supports such notion. However, we think the transition is still shaky. Following the VAT hike, private consumption plummeted in April and the recovery has been slow. Despite the tightening in the labor market, the year on year rise in wages is yet less than 1%. In our view, unless the wage inflation start to rise, Japan cannot shrug off the risk of a return to deflation.

For more details on consumers price index data, please click here.