Japan Inflation Accelerates, Households Cut Spending
Japan's inflation rate exceeded 2 percent for the first time in a decade as prices of food and gasoline surged, sapping household budgets in an economy that may already be in a recession.
Core prices, which exclude fresh food, climbed 2.4 percent in July from a year earlier after rising 1.9 percent in June, the statistics bureau said today in Tokyo. Household spending fell 0.5 percent from a year earlier, a fifth monthly decline.
The government announced it will spend 2 trillion yen ($18 billion) to help businesses and individuals cope with rising energy and material costs. Prices of daily necessities such as noodles, milk and gasoline are rising faster than wages, making it unlikely consumers at home will revive growth as the global slowdown reduces demand for Japanese goods abroad.
“Price increases without wage growth have devastated confidence of Japanese consumers and it's hard to anticipate consumption picking up anytime soon,'' said Hiroshi Shiraishi, an economist at Lehman Brothers Inc. in Tokyo. “The government's package is unlikely to provide much of a boost to the economy.''
The ratio of jobs available to applicants slid for a sixth month to 0.89, the lowest since October 2004, the Labor Ministry said. The jobless rate fell to 4 percent from 4.1 percent.
Industrial production unexpectedly rose 0.9 percent from June, when it fell 2.2 percent, the trade ministry said. The increase wasn't enough to revise the government's assessment that output is weakening as export growth slows.
Bonds Rise
Government bonds rose, capping a third month of gains, on signs growth in the world's second-largest economy is slowing. The yield on the 10-year bond fell 1.5 basis point to 1.405 percent at the close today.
July's increase in core prices was the steepest since October 2007, when they were boosted by a sales tax increase. Excluding the tax, prices last climbed that much 16 years ago.
The gains are unlikely to prompt the Bank of Japan to raise interest rates anytime soon because the economy is weakening and Governor Masaaki Shirakawa expects inflation will moderate as commodity costs ease. There are few signs inflation is spreading from food and fuel products because wage growth is weak, Shirakawa, 58, said this week.
“The Bank of Japan places more focus on economic growth than inflation now,'' said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. “The central bank will probably hold off raising rates until the third quarter of next year.''
Hitting Consumers
Economic and Fiscal Policy Minister Kaoru Yosano said faster inflation is “directly hitting consumers'' and wages need to increase for spending to pick up fast cash advance. Prices of goods purchased at least 15 times a year climbed 3.6 percent in July, today's report showed. Wages rose 0.4 percent in June.
Households' inflation expectations are rising. Consumers expect prices to be 9 percent higher by June 2009, according to a central bank survey released last month.
Today's economic package included reductions in highway tolls, projects to help temporary workers find permanent jobs, and financial support for transport companies. The government also said it plans to cut taxes for low-income earners.
“Households are tightening their belts as they can't be confident about the outlook for income and employment,'' said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “The government should encourage spending by consumers and companies to prop up growth, but those sorts of measures are just missing.''
Energy, Food
Energy-related products accounted for more than half of the increase in core prices, and food goods contributed one-third. Excluding food and energy, prices rose for only the third time since 1998, climbing 0.2 percent from a year earlier after increasing 0.1 percent in June.
McDonald's Holdings Co. Japan raised the price of a Big Mac this month. Nichirei Corp., a Tokyo-based food maker, plans to increase prices of some frozen foods next month.
Inflation in Tokyo slowed in August for the first time since prices resumed rising in November. Core prices in the capital, a harbinger of nationwide inflation, advanced 1.5 percent, less than the 1.6 percent increase in July.
“Japan's inflation may be close to the peak as oil prices are easing and weak consumption is preventing companies from passing on costs as much as they had hoped,'' said Tomoko Fujii, head of Japan economics and strategy at Bank of America Corp.
Bank of Japan policy makers have said they consider core prices to be stable between zero and 2 percent and they focus on inflation trends over the long term. “Unless core prices breach the range for a year at least, the Bank of Japan will regard any deviations just as temporary,'' Daiwa SMBC's Iwashita said.
The central bank has kept the key overnight lending rate at 0.5 percent since doubling it in February 2007. It shelved a policy of gradual rate increases in April, and last week said the economy was “sluggish'' for the first time in a decade after a report showed gross domestic product fell an annualized 2.4 percent in the second quarter.