Japan's inflationary momentum likely to be weaker than BoJ's target

BoJ governor Kuroda says the inflationary trend appears to be rising firmly. The BoJ stresses that factors such as the passing on of price increases to products as a result of costpush inflation caused by yen depreciation and the recovery in domestic demand are helping to push up inflation, especially for CPI (ex fresh food and ex energy) which is rising firmly. 

However, this is not sustainable inflation if there is no expansion of demand. The BoJ's output gap declined to -0.7% in Q2, reaching negative territory for the first time in three quarters. The situation in emerging countries and in China with the devaluation of its currency will also havean effect. 

"This could slow the pace of price increases, especially in clothing and food. The CPI (ex fresh food) of the country is expected to remain around 0% yoy for some time, and we will not see any acceleration in prices. After Q1 2016, when the base effect due to the fall in oil prices last year disappears, we expect prices (yoy%) to pick up. However, CPI is only expected to reach around +1.0% yoy by mid-FY2016 and inflationary momentum is much weaker than the BoJ is expecting (BoJ expects 2% inflation to be achieved "around the first half of FY2016")", argues Societe Generale.