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Even With Negative Interest Rates, Japan Has No Inflation

February 26, 2016

Governor of the Bank of Japan Haruhiko Kuroda explains his negative interest rate plan using a board during a press conference in Tokyo on January 29, 2016. TOSHIFUMI KITAMURA AFP/Getty Images

Falling fuel costs kept Japan’s core consumer prices unchanged in January from a year earlier, well below the central bank’s 2% target, highlighting the daunting task policymakers face in attempting to lift Japan out of stagnation.

A separate index by the Bank of Japan that strips away the effect of energy costs also showed inflation slowing, suggesting that weak consumption and falling import costs are discouraging firms from raising prices for a broad range of goods.

The data underscores the challenges the Bank of Japan (BOJ) faces, even after its shock decision last month to adopt negative interest rates, in generating a positive cycle in which rising corporate profits drive up wages and consumption.

The flat growth in the core consumer price index (CPI), which includes oil products but excludes volatile fresh food prices, matched a median market forecast and followed a 0.1% rise in December, data from the Internal Affairs Ministry showed on Friday.

“The recent strengthening of the yen implies that prices of imported consumer goods will continue to fall. We therefore expect goods inflation to slow further in coming months,” said Marcel Thieliant, senior economist at Capital Economics.

“Today’s data provide another reason for policymakers to step up the pace of (monetary) easing.”

Core consumer prices in Tokyo, which is a leading indicator of nationwide price trends, fell 0.1% in February to mark the second straight month of annual declines, the data showed.

A 10.7% fall in energy costs was mainly behind subdued nationwide inflation. But price rises also moderated for other items such as television sets and processed food, a sign the increase in import costs from previous yen falls was dissipating.

Wholesale prices fell 3.1% in the year to January, marking the 10th straight month of declines. Underscoring Japan’s sticky deflationary mindset, services prices have also barely risen and gained just 0.2% in January.

The slowdown in price hikes of imported goods is weighing on the BOJ’s own consumer price index, which excludes the effect of fresh food and energy costs but includes processed food prices.

The index, which the BOJ scrutinises in gauging the broad price trend, showed annual consumer inflation slowed to 1.1% in January from 1.3% in December.

The BOJ has used the index to explain that when excluding the downward pressure from the oil rout, inflation was accelerating steadily toward its 2% target.

It now expects inflation to hit 2% around the first half of fiscal 2017, a projection many analysts say is too optimistic.