Japan’s policy makers, striving for more than two years to end deflation, refrained from calling a victory after prices rose in April, with an economic recession damping the nation’s outlook.
Consumer prices excluding fresh food rose an annual 0.6 percent, the first gain since 2008, the statistics bureau said. Economy MinisterKaoru Yosano indicated today’s data don’t signal sustained gains. Japan’s challenges were highlighted by Fitch Ratings cutting its sovereign-rating outlook, citing the risk of rising debt on post-earthquake reconstruction.
The Bank of Japan is poised to keep its monetary stimulus, contrasting with counterparts from China to India that are tightening policy to stem inflation. Prices climbed in Japan after global energy and food costs rose and retailers suffered product shortages in the aftermath of a record earthquake and tsunami that caused the economy to shrink in the first quarter.
“The BOJ will probably add stimulus if it sees more signs of weakening demand,” said Azusa Kato, an economist at BNP Paribas in Tokyo. “If you strip out energy and food costs, consumer prices are basically flat now.”
The increase in consumer prices in April, the first since 2008, matched the median estimate in a Bloomberg News survey of 25 economists.
Retail Sales
Retail sales fell 4.8 percent from a year earlier in April, the Trade Ministry said in a separate report released today, underscoring the impact on consumers from the March disaster. The drop reinforces forecasts for gross domestic product to shrink for a third straight quarter in the three months to June.
Government bonds rose, with 10-year yields falling to 1.125 percent after the report, from 1.15 percent late yesterday, in a sign investors don’t see inflation taking hold of the world’s third-largest economy. They were little changed at 1.120 percent as of 4:26 p.m. in Tokyo. A gauge of the outlook for consumer prices over the coming seven years, derived from the gap in yields between regular bonds and inflation-linked securities, indicates average annual declines of 0.26 percent.
“A price gain in April isn’t likely to alter expectations that the BOJ will ease policy,” Maiko Noguchi, an economist at Daiwa Securities Capital Markets in Tokyo, said before today’s reports. “It’ll take time for Japan’s consumer prices to show solid and sustainable gains, which we probably won’t see until next year.”
Shirakawa’s Pledge
Governor Masaaki Shirakawa this week repeated the bank’s readiness to take more action if needed. His board discussed the potential need to expand an emergency-lending program to quake- stricken lenders on April 28. The board left its key lending rate near zero and other policy tools unchanged at that meeting as well as at this month’s gathering.
“We can’t say Japan’s experiencing inflation with a 0.6 percent increase” in core consumer prices, Yosano told reporters in Tokyo today.
Meantime, Fitch Ratings said in its statement today that Japan’s economy is at risk of companies considering relocating outside the nation in the aftermath of the March catastrophe, “leading to a greater permanent loss of output.” Fitch, which revised the outlook for its AA- long-term local-currency rating for Japan to negative from stable, urged policy makers to put forward a “more credible” debt consolidation plan.
Oil Costs
Part of the increase in the cost of living in April stemmed from the advance in global commodities. Crude oil prices have climbed 20 percent in the past six months, contributing to inflation that’s prompted countries from Thailand to China to raise borrowing costs.
Nisshin Foods Inc. this week announced a plan to raise prices of flour and pasta from July after the government increased wheat prices by 18 percent in April. The commodity has appreciated 40 percent in value this past year.
Rising costs of daily necessities “are spurring concerns that price hikes may further dampen consumption,” which has already slumped in the wake of the March 11 disaster, said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo.
A temporary shortage of consumer products after the quake also contributed to April’s price gains, said Kyohei Morita, chief economist at Barclays Capital in Tokyo. Even so, “price increases triggered by supply constrains will be temporary,” he said.
Tuition Waiver
Core prices also rose in April because the effect of a waiver that makes public high-school tuition free adopted in same month last year, which pushed down consumer prices, wore off. Prices may be depressed later this year when the government rebases the index, meaning that an increase in April won’t affect the bank’s inclination to loosen policy, said Daiwa’s Noguchi.
BOJ board members predicted last month core prices will probably rise 0.7 percent in the year to March 2012, higher than from their January forecast of 0.3 percent. The bank said the predictions don’t reflect the effect of a calculation method rebasing which will “highly likely” push down inflation rates.
The board members said they consider price increases of up to 2 percent as stable, with their median at about 1 percent. The bank has pledged to keep policy accommodative until it can expect stable prices.
To contact the reporters on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net