Japan economy shows signs of stagnation

Inflation in Japan has experienced a slight uptick in July while consumption data and business activity shows signs of stagnation in the economy.

Japan’s consumer price index rose by 1.3 per cent in July compared to the same month a year previous when discounting for the recent hike in consumption sales tax.

Headline inflation actually fell to to 3.4 per cent year on year in July from 3.6 per cent last month.

Consumption tax in Japan was brought up to 8 per cent from 5 per cent back in April this year. Economic data including inflation had been boosted ahead of the scheduled increase as consumers rushed to buy goods before the sales tax hike.

However the Japanese GDP actually contracted sharply overall during the second quarter as the aftermath of the increase in consumption tax weighed on the economy.

Further data released today by the Japanese government shows retail sales fell by 0.5 per cent compared to the previous month, marking the first decline since the sales tax increase was introduced in April.

Industrial production edged up by 2 per cent in July but this was not enough to offset the 3.4 per cent plunge in June and was below market expectations.

Capital Economics Japan economist Marcel Thieliant expects inflation could be set to fall further in the coming months. He says: “Inflation will likely moderate further in coming months. For a start, the output gap widened again following the sharp fall in demand last quarter.

“On past form, it is consistent with broadly unchanged consumer prices. In addition, the exchange rate has barely budged over the past year, and import price inflation has moderated accordingly. This points to lower inflationary pressure, too. The upshot is that the BOJ still has more work to do.”