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Japan's nationwide CPI (excluding fresh food) probably remained flat in May from a year ago (0.0% yoy), marking a significant slowdown from the +0.3% yoy observed in April. Following the introduction of the consumption tax (CT) hike in April 2014, there was a lag on certain price changes made by public utilities etc. which had a direct impact of 0.3pp on CPI in May 2014. This effect will drop out of the annual rate in May 2015 (most of the effect of the CT hike was felt in April 2014 when it pushed CPI up by 1.7pp), expects Societe Generale.
The inflationary trend in May is basically unchanged from April, because excluding the direct effects of the CT hike, CPI (ex fresh food and ex CT hike effects) in April was already at 0.0% yoy. Factors such as a pickup in oil prices, the passing-on of price increases to products as a result of cost-push inflation caused by yen depreciation, and the recovery in domestic demand are pushing up inflation.
In addition, downward pressure on prices due to the fall in oil prices will fade out after Q3. As a result, prices will pick up on a yoy basis. However, CPI is only expected to reach around +0.5% yoy by year-end.
"A modest inflation rate and a firm wage increase should enable real wages to increase, which in turn should increase consumption. Domestic demand expansion resulting from wage increases and further yen depreciation should push up inflation to around +1.5% in 2016", adds SocGen.
However, this will still not be enough to reach the 2% price stability target on a sustained basis.
"Meanwhile, Tokyo CPI (ex fresh food) is expected to remain unchanged at +0.2% yoy in June. The modest inflation is due to a rebound in oil prices and also upward pressure on food prices", estimates SocGen.
