Inflation fell back to zero in July while household spending dropped again, official data showed Friday, with the disappointing numbers sure to stoke speculation that the central bank will unleash more stimulus.
Core inflation, excluding volatile fresh food prices, was flat year-on-year, the internal affairs ministry said, as a result of lower fuel prices and other energy costs.
Household spending also fell 0.2 percent in July after declining 2.0 percent in the previous month, the ministry said.
The two monthly drops followed a strong rise of 4.8 percent in May that offered some hope for spending after consumers snapped their wallets shut in the wake of a consumption tax rate hike last year.
The sales levy increase — the country’s first in 17 years — was aimed at taming the huge national debt. Instead, it slammed the brakes on consumer spending and pushed the world’s number three economy into a brief recession.
While Japanese economic growth crawled out of the red in the last quarter of 2014, the economy turned negative again with a 0.4 percent contraction in the three months to June due to a slowdown in China, weak consumer spending at home and slowing exports after two consecutive quarters of growth.
Revised second-quarter figures are due next month.
Analysts have pointed to China — a major trading partner with Japan — as a red flag amid worries over the health of the world’s second largest economy and a stock market bloodbath that has sent global equity markets into a free fall.
The inflation figures on Friday are way below the Bank of Japan’s 2 percent inflation target and are sure to boost expectations that it will expand its already record ¥80 trillion ($640 billion) annual asset-buying plan to counter the downturn.
“The 2 percent inflation target no longer stands a chance of being achieved by early next year. It seems likely that the BOJ will have to launch additional easing,” said Junichi Makino, a chief economist at SMBC Nikko Securities.
Earlier this week, BOJ Gov. Haruhiko Kuroda held out the possibility of more monetary easing measures.
“At this stage, we have no concrete proposal for further accommodation. But if necessary, we will certainly make (an) . . . adjustment,” Kuroda said in a speech delivered in New York.
The slowdown comes more than two years after Prime Minister Shinzo Abe launched a policy blitz, dubbed ‘Abenomics,’ to kick-start anemic growth and conquer years of deflation.
The program called for big government spending, massive BOJ monetary easing and reforms to cut red tape in Japan’s highly-regulated economy — reforms that have now stalled, however.
“Japan’s economy isn’t looking good,” Yoshiki Shinke, an economist at Dai-ichi Life Research Institute, told Bloomberg News.
“Private consumption and exports are much weaker than what the Bank of Japan saw a few months ago.”
Core consumer prices are likely to remain below year — earlier levels “for the foreseeable future” due to the decline in oil prices, Shinke said.
“There’s a good chance for additional monetary easing in October,” he added.
Despite the weak figures, Japan’s labor market remained tight with the unemployment rate inching down 0.1 point to 3.3 percent in July, according to separate figures also released Friday.
A closely watched labor index also released Friday was at its strongest level in 23 years, at 121 job offers for every 100 people looking for work.