The war on deflation got a boost in October with a key inflation indicator rising at its fastest pace in 15 years, new data showed Friday, as the government battles to reverse years of falling prices.
Stripping out volatile food and energy prices, which have largely driven recent increases, prices inched up 0.3 percent last month, the country’s best result since August 1998.
The broader consumer price index, which measures a basket of everyday goods but excludes fresh food, rose 0.9 percent last month from a year earlier, the fastest pace in five years.
Prime Minister Shinzo Abe’s government has put conquering deflation and stoking growth in the world’s third-largest economy at the top of its agenda with a policy blitz dubbed “Abenomics.”
The upbeat headline for Friday’s inflation data was tempered by the fact that prices were still largely driven up by higher fuel bills, not surging demand for everyday goods that power the economy as a whole.
Electricity bills jumped a hefty 8.2 percent, the data showed, as the country’s energy costs soar amid the nationwide reactor shutdown stemming from the Fukushima nuclear plant disaster and costly imports of thermal plant fuels amid the weaker yen, itself a product of Abenomics.
Since the 2011 start of the nuclear catastrophe, the nation has been importing fossil fuels to plug the energy gap, a pricey option that has become even more expensive as the yen sharply weakened in the wake of the Bank of Japan’s unprecedented monetary easing drive.
Friday’s data showed the BOJ’s ambitious 2 percent inflation target — set to be reached in just two years — is still far off.
Analysts have been warning that Tokyo’s bold pro-growth program — a mix of big government spending and central bank monetary easing — is not enough on its own without promised economic reforms.
Koichi Fujishiro, economist at Dai-ichi Life Research Institute, said Abe’s plan played a “big role” in the upbeat inflation figures.
“But it’s not only because of Abenomics — it’s also due to the fact that Japan’s economy is recovering smoothly,” he said.
“Inflation is being pushed by higher costs. What’s different from the past is that companies have started to pass on higher costs by pushing up the price they charge for products. Firms are becoming more confident.”
While falling prices may sound like a good thing for shoppers, it can be bad for growth because they encourage consumers to put off spending, knowing they will pay less for a product if they wait.
That makes it difficult for firms to invest and discourages them from hiking pay. This in turn curbs consumer spending further.
Getting Japan’s notoriously thrifty households to spend more is a key part of Abe’s drive, as are yet-to-be-seen wage rises.
In other data published Friday, household spending rose 0.9 percent last month, ahead of a sales tax hike next year, while the unemployment rate held steady at 4 percent.
Factory output expanded by a weaker-than-expected 0.5 percent in October, trailing 1.3 percent growth the previous month and way off an earlier manufacturers’ forecast, which had predicted a 4.7 percent rise in output.
The economy ministry painted the figures in a positive light, saying “industrial production continues to show an upward movement.”
Fujishiro at Dai-ichi Life Research Institute called the latest figures “disappointing.”
Last week, the BOJ held off fresh policy measures to stimulate growth, saying the economy is “recovering moderately” while efforts to stoke inflation are taking hold.
But economic growth halved in the July-September quarter — after Japan led the Group of Seven nations in the first half of the year — as exports weakened and consumer spending slowed.
Abe’s big test will be key reforms, including loosening rigid labor laws and signing wide-ranging free trade deals, seen as crucial for a lasting turnaround.
Legislators have passed a bill that paves the way for an opening up of the electricity sector and Abe is pushing through a bid to strip away protections for the agricultural sector, but it remains to be seen if deeper reforms are in the offing.