Prime Minister Shinzo Abe’s bid to vault Japan out of 15 years of deflation risks losing public support by spurring too much inflation too quickly as companies add extra price increases to this month’s sales tax bump.
Businesses from Suntory Beverage and Food Ltd. to beef bowl chain Yoshinoya Holdings Co. have raised costs more than the 3 percentage point levy increase. This month’s inflation rate could be 3.5 percent, the fastest since 1982, according to Yoshiki Shinke, the most accurate forecaster of the economy for two years running in data compiled by Bloomberg.
The challenge for Abe and the Bank of Japan is to keep the public focused on the long-term benefits of exiting deflation when wages are yet to pick up and, according to BOJ board member Sayuri Shirai, most people still see price gains as “unfavorable.” Any jump in inflation that’s perceived as excessive by a population more used to prices falling could worsen consumer confidence and make it harder to boost growth.
“Households are already seeing their real incomes eroding and it will get worse with faster inflation,” said Taro Saito, director of economic research at NLI Research Institute, who says he’s seen prices of Chinese food and coffee rising more than the sales levy. “Consumer spending will weaken and a rebound in the economy will lack strength, putting Abe in a difficult position.”
The Topix index of shares swung between gains and losses, after capping its worst week since June. The gauge has dropped 12 percent this year after surging 52 percent in 2013. The yen was up 0.1 percent at 101.55 per dollar.
Tadashi Yanai, the billionaire president of clothing retailer Fast Retailing Co., said Thursday that he’s not optimistic about the outlook for consumption, ahead of a plunge in his company’s shares that contributed to this year’s 13 percent slide in the Topix index.
Accelerated inflation would squeeze households, with wages excluding overtime and bonuses declining in February for a 21st straight month, down 0.3 percent from a year earlier, according to April 1 labor ministry data. Saito, ranked No. 3 forecaster last year, sees the risk of a 3.6 percent increase in the April core consumer price index, which excludes fresh food but not energy, after a 1.3 percent gain in February.
A consumer confidence gauge fell for a third straight month in February to 38.3, down from a six-year high of 45.7 last May and the lowest since September 2011, according to a Cabinet Office survey.
“Consumer sentiment has been undermined to a large extent by rising prices,” wrote Goldman Sachs Group Inc. economists Naohiko Baba and Yuriko Tanaka in an April 12 note, predicting “a major retreat in sentiment from April as the tax hike drives inflation.”
The sales tax increase is Abe’s biggest attempt since he took office in December 2012 to a get a grip on the world’s heaviest debt burden. While his reflationary effort has helped boost the job market, the blow from the higher levy is forecast to trigger a 3.35 percent annualized contraction in the three months from April, according to a survey of economists by Bloomberg.
Abe’s attack on deflation — spearheaded by unprecedented easing by the central bank — has helped weaken the yen by 23 percent against the dollar over the past year and a half, boosting the cost of imported goods and energy for Japanese companies.
Doutor Coffee Co. said on Feb. 28 it will raise coffee prices by 10 percent from April 1, citing increasing costs of materials and labor. Suntory said March 3 it will increase the price of drinks at vending machines by 8 percent on April 1. Barbershop franchise QB Net Co. raised the price of a haircut by 8 percent this month.
Companies tend to change their prices in April — when the fiscal year begins — and in October, the start of the second half, Shinke said.
The government is trying to ensure businesses pass the burden of the higher sales tax on to customers. The Ministry of Economy, Trade and Industry dispatched 474 inspectors to check companies’ handling of the levy and had ordered 1,199 cases of wrongdoing to be corrected as of the end of March, it said in a statement on April 7.
Many businesses likely weren’t able to fully pass on higher material and operations costs when the economy was stagnating and are now seizing the sales tax bump as a chance to act, with some likely also looking to claw back costs of wage increases, Shinke said.
The Consumer Affairs Agency said it received 442 phone calls between April 1 to 7 from people expressing concern about price increases.
In a Feb. 27 speech in New York, the BOJ’s Shirai said it was “striking” that most of the public viewed price rises as unfavorable, with survey results implying that the importance of the central bank’s target of stable 2 percent inflation “may not be widely understood and shared by households.” Shirai said it was vital to explain to people “how this will improve lives in the medium to long term.”
Shinke and Saito forecast the core consumer price index will rise by about 1.5 percent in April from a year earlier, excluding the impact of the sales tax increase.
Still, Shinke said there’s a risk that inflation could accelerate to 1.8 percent this month, excluding the boost from the higher levy, as companies raise prices — close to the BOJ’s 2 percent goal. Saito sees a chance of 1.9 percent.
An acceleration in inflation would mean it’s “very unlikely” the central bank will bolster stimulus, said Saito. Shinke said while faster price gains could prompt economists to push back the projected timing of further easing, BOJ policy will depend on the economy.
Shinke sees two potential paths for the economy after a inflation surge. Under one scenario, households cut spending, with a weak economic rebound from a slump after the sales tax hike putting “Abenomics” at risk. Under the other, consumer spending bounces back, supported by a tight labor market that lifts incomes.
“High inflation could push the economy either way,” said Shinke.
A survey of economists ahead of last week’s BOJ meeting showed 72 percent forecasting extra easing would happen before or during July.