While recent data have been relatively positive, in economics, things
aren’t often what they seem. But it’s also worth noting that we are
still in the early days of Abe’s program (he just took office at the end
of 2012), so time will tell.
Japan’s core inflation rate, which excludes volatile fresh food
prices but includes fuel costs, is expected to have hit its highest in
nearly five years in July and factory output is seen rebounding,
according to analysts polled by Thomson Reuters. Both reports are due
out Thursday night (New York time).
The nationwide core consumer price index is forecast to have risen
0.6 percent in July from a year earlier. That would follow a 0.4 percent
increase in June and mark the biggest increase since a 1.0 percent gain
in November 2008.
However, economists at Barclays still expect inflation of only 1.1
percent in the first quarter of 2015 -- short of the Bank of Japan’s “2
percent in two years” target for the overall CPI set in April.
Meanwhile, Thursday’s report should show that industrial production
rose 3.7 percent in July, following a 3.1 percent decline in June, the
polled showed. Other hard data include July retail sales (Wednesday) and
unemployment rate (Thursday), which is projected to remain at 3.9
percent in July.
The Wrong Kind Of Inflation
Some analysts raised concerns about the details of the inflation
data. It has come to their attention that although Japan is getting
higher inflation as planned, it is the wrong sort of inflation -- the
rise has been driven mostly by gasoline and electricity prices. And
higher energy costs will raise business costs and eat into consumers'
real incomes.
“The recent upturn in inflation should not be credited to Abenomics,
at least not entirely,” Tim Quinlan of Wells Fargo Securities said in a
note.
After 15 years in which deflation was the over-arching price dynamic,
Japan’s central bank rolled out a sweeping new set of monetary policy
tools to more than double the monetary base in the span of two years
with the stated goal of lifting the CPI inflation rate to 2.0 percent.
In July, Japan’s monetary base expanded 38 percent from a year
earlier to 170.39 trillion yen ($1.73 trillion), marking a record high
for the fifth straight month. The BoJ said it will continue to inject
money into the financial system under its Quantitative and Qualitative
Monetary Policy Easing program, or QQE, for short.
“While we think the goal is laudable, we suspect in the final measure
it may be difficult for the BoJ to pull off,” Quinlan said.
Japan’s ultra-easy monetary policy successfully drove down the yen. But a weaker yen is a double-edged sword.
It helped Japan’s exports jump in July from a year earlier at the
fastest pace in almost three years, but at the same time, also pushed up
the import bills by the most in three years. The key driver for higher
inflation not just over the past few months, but over the past year, has
been the higher cost for energy, specifically fuel, light and water.
Almost all of Japan’s nuclear reactors have remained idle since the tragic
Fukushima disaster in March 2011, putting extra pressure on the energy import bill.
A few reactors are back up and running, but domestic sentiment has
certainly become very hostile toward nuclear-generated power. The result
of this in terms of inflation is that Japan is importing a lot more
liquid natural gas and paying a lot more for it.
In most parts of the world, natural gas prices are much lower today
than they were at cycle peaks in 2005 and 2008, but in Japan imported
natural gas prices are at an all-time high, according to Quinlan.
Japan is importing a lot more liquid natural gas and paying a lot more for it.
IHS Global Insight, LNG Japan Corporation, Bloomberg LP and Wells Fargo Securities LLC
Tax Hike
The biggest immediate problem for Abe is whether this week’s slew of
data for July could strengthen the case for the government to go ahead
with a scheduled two-stage hike in the sales tax from next year. The
sales tax hike -- from 5 percent to 8 percent next April and to 10
percent in October 2015 – is designed to show markets that Tokyo is
serious about tackling Japan's burgeoning public debt, currently 240
percent of gross domestic product.
Opponents of the hike say increasing the tax now would kill the
positive momentum of an economy that has just started to recover.
Preliminary data issued earlier this month showed Japan's economy grew
an annualized 2.6 percent in the second quarter. That’s the third
straight quarter of expansion, but still slower than the 3.6 percent
expected.
The government will hold meetings about the tax hikes with executives
and academics through this week. Abe is expected to make a decision
before an APEC summit on Oct. 7. Officials have flagged revised
April-June GDP data, due on Sept. 9, as key in reaching the decision.
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