Ja­pan re­ports in­fla­tion & house­hold spend­ing soft­ened for last month

The China Post - - WORLD BUSINESS -

The back­drop to the wild drama in fi­nan­cial mar­kets over the past few weeks is a less dra­matic but more daunt­ing re­al­ity: the deepseated chal­lenges for sus­tain­ing long-term growth, es­pe­cially for ag­ing economies like Ja­pan’s.

Ja­pan re­leased data Fri­day show­ing its econ­omy has yet to es­cape the dol­drums more than two years af­ter Prime Min­is­ter Shinzo Abe launched an un­prece­dented ef­fort to jolt the coun­try out of its de­fla­tion­ary rut.

Core in­fla­tion ex­clud­ing volatile food prices flat-lined at its low­est level in more than two years in July and house­hold spend­ing also slowed, the gov­ern­ment re­ported.

Un­em­ploy­ment edged down to 3.3 per­cent and house­hold in­comes rose 5.4 per­cent in real terms, thanks largely to semi-an­nual bonus pay­ments. Such trends are lead­ing econ­o­mists for forecast the econ­omy will re­turn to ex­pan­sion af­ter a 1.6 per­cent con­trac­tion in an­nual terms in April-June.

But the mid­dling vi­tal signs, and wor­ries over main­land China’s abil­ity to stoke its own growth, may raise pres­sure on the Bank of Ja­pan to up its un­prece­dented bar- rage of mon­e­tary stim­u­lus.

The cen­tral bank is spend­ing tril­lions of yen (bil­lions of U.S. dol­lars) a month on as­set pur­chases in­tended to push in­fla­tion higher and end years of de­fla­tion, or chronic price de­creases.

The aim is to get con­sumers and busi­nesses to spend more money and spur growth, but so far the in­fla­tion rate re­mains far from the of­fi­cial 2 per­cent tar­get, and the spend­ing that ac­counts for most of Ja­pan’s eco­nomic ac­tiv­ity has re­mained lack­lus­ter de­spite mod­est in­creases in some work­ers’ wages.

It is un­clear if the re­cent gy­ra­tions in share prices will have a spillover ef­fect on spend­ing.

The main Nikkei 225 stock in­dex climbed 2.8 per­cent on Fri­day, though it was still down more than 6 per­cent for the week.

BOJ Gov. Haruhiko Kuroda said in a speech to the Ja­pan So­ci­ety in New York this week that the bank is keep­ing a close eye on po­ten­tial risks and will “make ad­just­ments with­out hes­i­ta­tion as nec­es­sary.”

He pointed to ris­ing ma­chin­ery or­ders and con­struc­tion starts — and the first hike in the price of ketchup in Ja­pan in 25 years — as ev­i­dence the mon­e­tary eas­ing is bear­ing fruit.

Still, he ac­knowl­edged wide­spread dis­ap­point­ment with Ja­pan’s progress so far in re­vamp­ing its econ­omy to im­prove its com­pet­i­tive­ness as promised by Abe in early 2013.

Kuroda ac­knowl­edged con­cerns over the risks from weak­en­ing de­mand as ex­ports to China and other emerg­ing mar­kets stall.

But he and other Ja­panese of­fi­cials in­sist the econ­omy is still head­ing for a “mod­er­ate re­cov­ery.” And while house­holds re­main fru­gal, rel­a­tively solid re­tail sales could carry on into a much stronger show­ing for Au­gust, says Masamichi Adachi of JPMor­gan.

In the longer term, the out­look is much less cer­tain.

Cor­po­rate prof­its have surged to record lev­els, in part be­cause a weak­en­ing of the Ja­panese yen means rev­enues earned over­seas buy lo­cal cur­rency.

But busi­ness in­vest­ment re­mains mod­est since com­pa­nies are wary of build­ing more ca­pac­ity in the do­mes­tic mar­ket when the pop­u­la­tion is ag­ing and shrink­ing. So over­all pro­duc­tiv­ity re­mains be­low the level it was at in 2010, ac­cord­ing to the latest data from the Ja­pan Pro­duc­tiv­ity Cen­ter.

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