Business / Economy

Inflation drive hampered by recession-hobbled economy

Bloomberg

Inflation slowed for a fourth month in November and industrial production and retail sales unexpectedly dropped, based on government data released Friday, pointing to further weakness in an economy Prime Minister Shinzo Abe is trying to revive from recession.

Output fell 0.6 percent in November from a month earlier, the Ministry of Economy, Trade and Industry reported, against a median estimate of a 0.8 percent increase in a Bloomberg survey of economists.

Retail sales slid 0.3 percent, while consumer prices excluding fresh food rose 2.7 percent from a year earlier. Real wages fell the most since 2009.

With little sign of a rebound in domestic demand, the world’s third-largest economy may be reliant on exports to avert a third straight quarterly contraction in the final three months of the year.

Friday’s reports add pressure on Abe, who pledged growth-inducing structural changes after winning re-election this month and whose administration will unveil another stimulus package Saturday as he continues his unorthodox drive to conquer deflation.

“Companies have to see a recovery in domestic consumption before boosting production,” said Minoru Nogimori, an economist at Nomura Holdings Inc., noting any rebound in the economy in the fourth quarter “will be far from strong.”

With oil prices weighing on inflation, the BOJ is likely to boost stimulus again, probably around October, he said.

Stripped of the effect of April’s consumption tax hike, core consumer prices — the Bank of Japan’s key measure — rose 0.7 percent, moving further away from the BOJ’s 2 percent inflation target.

Tumbling oil prices could push inflation as low as 0.5 percent by the middle of next year, according to economists at NLI Research Institute and Dai-ichi Life Research Institute.

BOJ Gov. Haruhiko Kuroda said Thursday that over the longer term, cheaper oil will support the economy and spur consumer prices.

Energy prices dropped 1.2 percent from a month earlier, according to Friday’s data. The price of Dubai crude oil, a benchmark for Middle East supply to Asia, has shed about half of its value in the past year. Gasoline prices in Japan last week declined the most in almost six years.

“Japan, a commodity-importing country, gains a large advantage from the decline in crude oil prices,” Kuroda said in a speech to business leaders in Tokyo. The decline, he added, “will lead to an increase in underlying prices from a somewhat longer-term perspective.”

Kuroda’s emphasis on the boost that cheaper oil will eventually give to inflation indicates additional easing isn’t imminent, said Maiko Noguchi, an economist at Daiwa Securities Co. and a former BOJ official.

Sixteen of 33 economists see the central bank increasing its easing again before August, and the most popular forecast was for a boost at the second BOJ Policy Board meeting in October 2015, according to a survey of economists conducted by Bloomberg before the last policy meeting.

The BOJ is counting on rising inflation expectations and a narrowing gap between supply and demand to drive up consumer prices over the longer term.

Spending by consumers and businesses tumbled after Abe raised the consumption tax in April by 3 points, plunging the economy into its fourth recession since 2008. Last month, he postponed the second and final hike in the levy, to 10 percent in October next year, by 18 months, putting the near-term focus on reviving the economy over reining in the world’s heaviest debt burden.

Speaking to business leaders in Tokyo on Thursday, Abe said his government will announce details of an economic stimulus package aimed at spurring consumption and regional development. Kuroda also called on companies to deploy cash and invest more on facilities and workers, saying “the rule book for business will be rewritten” if the economy is to successfully emerge from deflation.

Corporate holdings of cash and deposits rose to a record ¥233 trillion at the end of September, according to the BOJ.

Wages have failed to keep up with rising living costs that were boosted by April’s sales tax hike. Real wages dropped 4.3 percent in November from a year earlier, the steepest fall since December 2009. Total cash earnings slid 1.5 percent.

Abe and the nation’s biggest business lobbies last week agreed to work on boosting wages.

“I want companies with high profits that are benefiting from the weak yen to raise wages, investment, and on top of that, consider the prices they pay their suppliers,” Abe said at the meeting on Dec. 16.

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