Japan’s CPI likely rose by 0.1% y/y in December

The consumer price index of Japan is expected to have increased by 0.1% y/y in December. Inflation is being accelerated with the help of certain factors such as passing on of price rises to products due to cost push inflation as a result of yen's decline. The nation's core CPI continues to be at around 0% because of declining oil prices. In November, the CPI, excluding fresh food and energy, rose by 1.2% y/y. However, the inflation is not reaching the 2% target rate set by the Bank of Japan.

Meanwhile, Japan's real growth rate is expected to have remained at around +0.7% in 2015, matching the potential growth rate. The consumer sentiment also continues to be low due to the implementation of the consumption tax hike before a robust hike in wage increases.

Japan's total exit from deflation seems difficult as corporate activities have weakened because of uncertainty in external factors like China's economy. Meanwhile, excessive demand is also slowing down that could have accelerated inflation to 2%. The core CPI is expected to continue at the present level and is not likely to accelerate for some time.

CPI, excluding fresh food, has been at around 0% y/y since mid-2015, mostly because of the rapid decline in oil prices. If oil prices continue at the current level, the base effect will reduce and the CPI might increase up to +0.5% y/y in Q1 2016 and afterwards. However, it is not expected to quicken towards 2% in H2 FY2016. Meanwhile, in 2016, a rise in real wages can boost consumption, as inflation is expected to occur only after rise in wages.  By late 2016, CPI is expected to reach around +1.0%.

It is essential that the jobless rate declines much below 3% in a bid to reach the central bank's inflation target rate of 2%. The tight labor market will bolster wage rise, which will then help accelerate inflation. However, consumption is expected to ease again for a brief period of time as the next consumption tax hike will take place in April 2017.