Japan’s CPI (excluding fresh food) likely to have declined in April

Japan’s CPI, stripping fresh food, is expected to have declined for the second straight month in April. The nationwide CPI likely dropped by 0.4% y/y in April, following a decline of 0.3% in March, said Societe Generale in a research report. Meanwhile, core CPI, excluding fresh food, continues to be under pressure because of the decline in oil prices in 2015. Japan’s CPI, stripping food and energy, is expected to have accelerated 0.5% y/y, as compared with March’s rise of 0.7% y/y. This affirms that inflation is facing a downward trend.

Japan’s real GDP growth contracted 1.7% in the final quarter of 2015, whereas it expanded 1.7% in the first quarter of 2016. This indicates that the economic growth is temporarily weaker that the potential expansion of about 0.5%, noted Societe Generale. Therefore, it appears that energy prices, along with weak demand are causing weak inflation.

Fiscal stimulus measures are likely to be implemented to boost demand. Japan is already implementing a stimulus measure of JPY 3.5 trillion under the supplementary budget for FY15. Also, additional measure of JPY 1 trillion has been agreed for Kumamoto earthquake area. Moreover, under the FY 2016 supplementary budget, the government is expected to announce additional stimulus measure of at least JPY 5 trillion, according to Societe Generale. With the help of these stimulus measures, demand should rebound in second half of 2016.

Furthermore, oil prices have recovered, while manufacturer inventory adjustments are not exerting downward pressure on global inflation. There is a high possibility that the core CPI, excluding fresh food, will continue to be in the negative territory until summer. But post autumn and towards winter, the core inflation is expected to slowly rebound to about 0.5% y/y, excluding the consumption tax hike’s direct impact, added Societe Generale.

In the mid-term, Japan’s inflation is expected to be at about 1%. However, the BoJ will find it tough to attain the price stability target of 2% by the end of FY 2017. This suggests that the central bank will have to carry on with its QQE for a longer period of time, said Societe Generale.