Japan CPI to reach 0.5% by year end

The second CT hike scheduled to start in April 2017 is also suppressing Japan's consumer sentiment. Corporates are now aware of the rising risk that further price increases may result in a deterioration of consumer demand. Thus, corporates are cautious about increasing prices. The situation in China with the devaluation of its currency will also have an effect. 

"It could slow down the pace of price increases, especially in clothing and food. CPI is only expected to reach around +0.5% yoy by year-end and inflationary momentum is much weaker than what the BoJ was expecting. Expansion of domestic demand resulting from wage increases and further yen depreciation should push up inflation to around +1.5% by the end of FY16", says 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 recovery in domestic demand, which is also putting upward pressure on food costs. In other words, the BoJ finds it difficult to capture the whole inflation merely by looking at "core CPI" (ex fresh food), which includes falling energy prices. 

This is also the case for "core core CPI", which excludes food and energy. However, even such a view will not alter the BoJ's commitment to achieve its 2% target. The 2% target is a firm objective, as it was decided not only by the BoJ, but was also included in PM Abe's LDP manifesto during the general election campaign of December 2014, which won the confidence of voters.

"Meanwhile, Tokyo CPI (ex fresh food) is expected to remain flat (0.0% yoy) in August, after falling to -0.1% yoy in July. The CPI is expected to remain at 0% yoy for a while as there is no sign of acceleration in prices", added Societe Generale.