Japanese Inflation Stubbornly Below Target

Real disposable income of worker’s households rebounded in October by 2.3%. However, viewed over a longer period, income is on a declining trend. This is partly due to the disappointing summer bonuses. Moreover, labour costs are mitigated through the replacement of retiring workers by younger and less expensive staff.

Nevertheless, consumption for worker’s households and all households is on a slightly positive trend in October. The annualised six-month rate of change was 0.3 and 0.4, respectively. This is partly related to the purchase incentives implemented by the government. In particular, in recent months, car purchases were boosted by subsidies for eco-friendly cars.

Also expenditure for medical care is trending up strongly, which is not surprising given the rapidly ageing population. This is to the detriment of sales in other categories such as clothes and recreation, which both have been on a downward trend. As expected, expenditure on food has been more or less flat.

Consumer price inflation stood at -0.4% in October. Excluding fresh food, inflation was zero, only marginally higher than in the previous month. This rise was mainly due to higher energy prices. The Bank of Japan aims to increase the inflation rate, excluding fresh food to 1%.

During the campaign for the upcoming Lower House election on 16 December, the Liberal Democratic Party (LDP) leader Shinzō Abe, has suggested to raise the inflation rate to 2%. He has called on the BoJ to pursue “unlimited” monetary easing to achieve this target. Polls suggest that the long dominant LDP may return to power after three years in the opposition. In that case, Shinzō Abe will become the next prime-minister.

Financial markets are very concerned about these proposals. They fear that the BoJ’s independence could be in danger if the LDP will return to power. Since mid November, the yen has lost 4% of its value vis-à-vis the dollar. This might be good news for those who consider that the Japanese currency is overvalued. However, uncertainty about policies is never good for the investment climate.

Raymond VAN DER PUTTEN

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