Abe Puts Inflation Goal More Out of Reach With Mobile Rate Cuts

  • Consumer prices fall for first time since April 2013
  • Japan mobile carriers' shares have tumbled this month

Inflation expectations as reflected by Japan’s bond market are the lowest in seven months after consumer prices fell in August. Prime Minister Shinzo Abe’s plan to cut mobile phone rates may further weigh on the price outlook.

Consumer prices excluding fresh food dropped 0.1 percent from a year earlier, the first decline since April 2013, the same month the Bank of Japan began its unprecedented stimulus. The bond market expected average inflation of 0.83 percent in Japan over the next 10 years on Sept. 25, according to the break-even rate, the lowest outlook since February and below the BOJ’s target of 2 percent.

Abe’s push to lift Japan out of deflation is facing skepticism from private-sector analysts. Not one out of 34 economists expects the BOJ to meet its inflation goal during its target period to around September 2016, according to a Bloomberg survey this month. His plan to lower mobile phone rates charged by companies including NTT Docomo Inc. could put further downward pressure on prices while making the fees more in line with those in overseas cities.

“Mobile phone rates make up a big portion of CPI, so if rates are cut by 10 to 20 percent, that would have a pretty significant impact,” said Yuya Yamashita, a rates strategist in Tokyo at JPMorgan Chase & Co. “If the CPI numbers fall, that could boost speculation for further monetary stimulus.”

Yamashita puts the odds of additional easing at the BOJ’s Oct. 30 policy meeting at 50:50, and that the risk is skewed toward falling yields. Almost one-third of the economists surveyed by Bloomberg Sept. 7-10 predicted an expansion of stimulus on that date, when the central bank updates its estimates for growth and inflation.

The 10-year Japanese government bond yield dropped to as low as 0.32 percent Friday, a level unseen since April 30, when the Japanese central bank pushed back its time frame for reaching stable 2 percent inflation from its original two-year deadline. The yield, which was at 0.33 percent on Monday, dipped to a record 0.195 percent on Jan. 20.

Japan’s 10-year break-even rate, the difference between yields on conventional and index-linked notes, has come down from as high as 1.39 percent in June last year.

Mobile phone charges make up 2.2 percent of the central bank’s preferred inflation gauge. All three of Japan’s largest carriers -- NTT Docomo, SoftBank Group Corp. and KDDI Corp. -- offered discounted phone plans to coincide with the launch of Apple Inc.’s iPhone 6s and 6s Plus in the country, according to public broadcaster NHK.

Mobile Burden

Abe told a meeting of the country’s Council on Economic and Fiscal Policy on Sept. 11 that reducing the burden on households from mobile phone fees was an important issue to tackle, according to minutes of the meeting posted on the Prime Minister’s website.

The mobile carriers’ shares have tumbled since then. NTT Docomo has dropped 13 percent since Sept. 11, while KDDI has fallen 10 percent and SoftBank has also lost 11 percent. The Topix share index has declined 2.1 percent during the period.

“Whatever you think about politicians directly intervening in deciding phone rates, the fact is that the carriers’ dominance has kept prices high, and the reduction is going to help increase households’ purchasing power,” said Azusa Kato, a Tokyo-based economist at BNP Paribas SA. “It’s nonsensical to prioritize achieving the 2 percent inflation target when the economy is slowing and consumer spending is sluggish.”

Economic Contraction

BOJ Governor Haruhiko Kuroda already faced a high hurdle to his inflation goal from a slump in energy costs that caused the consumer price index to flat-line from the start of this year. Japan’s economy has contracted in three of the past five quarters.

Economy Minister Akira Amari said after the release of Friday’s price data that there was no need to be downbeat on the economy, and the central bank would make appropriate decisions on stimulus.

Kuroda said following a meeting with Abe the same day that Japan’s price trend is strong, with CPI rising at about 1.1 percent if energy prices were excluded. He has said previously that the central bank won’t hesitate to adjust policy if there is a danger of prices not rising to the main target.

“With the outlook for Japan’s economy increasingly unclear, expectations of additional easing are gradually building,” said Shuji Tonouchi, a senior market economist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co., which expects an expansion of BOJ stimulus in late-October. “That will put downward pressure on yields.”

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