Japan’s CPI ex-fresh food likely remained in negative territory in September

Japan’s consumer price inflation, excluding fresh food, is expected to have stayed in the negative territory in September. According to a Societe Generale research report, nationwide CPI, excluding fresh food, is likely to have come in at -0.5 percent year-on-year, unchanged from August. This would be the seventh straight month of negative growth. Energy prices alone are not to be blamed for stagnating prices and it was possibly a contributing factor to the Bank of Japan’s shift in policy stance to interest rate from quantity during September meeting.

The central bank noted that apart from a fall in energy prices, there were other factors contributing to the fall in inflation. The other factors include the weakness in private consumption because of the 2014 hike in consumption tax, subsequent uncertainties in the global financial markets and the deceleration in emerging markets since the summer of 2015.

“We expect September CPI (ex-food and energy) to be 0.0 percent yoy, a decline from the +0.2 percent yoy for in August, which would be the first time that growth has stopped since September 2013”, added Societe Generale.

Softness in demand has resulted in certain companies in cutting their prices. Meanwhile, as the labor market continues to be quite tight, aggregate wages are likely to continue to increase next year, outpacing the rise in prices, which might result in a rise in real wages. This might possibly assist in the rebound in domestic demand, which might push up prices again. Moreover, a rebound in energy prices might also contribute positively to rising prices.

“We expect CPI (ex-Fresh food) to reach +0.5 percent yoy by end-2017 and confirm a return to the path toward a complete exit from deflation”, noted Societe Generale.

The October Tokyo CPI ex-fresh food is likely to have come in at -0.4 percent year-on-year, a mild rebound from the -0.5 percent in September. But there is likelihood that firms would cut prices to increase demand in the first quarter of 2017 before the fiscal year ends. Hence the drop in the pace of inflation is unlikely to be confirmed before the second quarter of 2017, according to Societe Generale.