Recent Japan nationwide CPI trend shows stagnant inflation in recent months

Japan's nationwide CPI (excluding fresh food) has remained flat at around +0.1% yoy during the past few months, pointing to stagnant inflation. Factors such as 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. 

"However, there will be a base effect due to last year's rise in oil prices that continued through to mid-2014. Assuming that oil prices remain at the current level, there is a risk that CPI will remain at around 0% yoy or even temporarily fall below 0% yoy", says Societe Generale. 

Since April (the beginning of FY15), the effects of upward pressure on wages have been getting stronger. In Q4, the base effect due to the fall in oil prices will fade out. 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, and consumption should expand as a result. Domestic demand expansion resulting from wage increases and further yen depreciation should push up inflation to around +1.5% by the end of FY16", added Societe Generale.

However, this will still not be enough to reach the BoJ's 2% price stability target on a sustained basis. The BoJ stresses that inflation is strengthening as a result of yen depreciation and domestic demand recovery, which is also putting upward pressure on food costs.