Japan’s inflation target becoming more difficult to achieve

Japan's nationwide CPI (excluding fresh food) is likely to have risen 0.3% yoy in April (sharply down from 2.2% in March).This is because most of the effect of the consumption tax (CT) hike in April 2014, which pushed up CPI by 1.7pp, will drop out of the annual rate. (There was a lag on changes in prices by public utilities etc. after the CT hike, and the direct impact of the CT hike on the CPI was 0.3pp mom in May.) Excluding the effects of the CT hike, CPI (ex fresh food and ex CT hike effects) is likely to slow down to +0.0% yoy from +0.2% yoy in March, says Societe Generale. 

Factors such as a pickup in oil prices, 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 occurred until mid-2014 - there is a risk that the CPI will remain around 0% or even temporarily fall below 0% yoy by summer 2015. Since April (beginning of the new FY15), the effects of upward pressure on wages is getting stronger. In addition, the downward pressure on prices due to the fall in oil prices will fade out after Q3. As a result, prices will pick up on a yoy basis. 

However, the CPI will only reach around +0.5% yoy by year-end. A modest inflation rate and a firm wage increase will enable real wages to increase. This in turn will expand consumption. Domestic demand expansion as a result of wage increases and further yen depreciation will push up inflation in 2016 to around +1.5%. However, it will still not be strong enough to reach the 2% price stability target. Meanwhile, Tokyo CPI (ex fresh food) is expected to fall to +0.3% yoy in May, after +0.4% yoy in April. However, excluding the CT hike effect (+0.3pp), Tokyo CPI (ex fresh food, ex CT hike effects) is likely to have accelerated to +0.3% yoy in May after +0.1% yoy in April. An upward pressure on prices casn be seen due to price changes made at the beginning of the new fiscal year (April).