Japan Prices Rise Most Since ’08 in Boost for Abe

Japan consumer prices rose the most since 2008 in June, an early sign that the world’s third-biggest economy may be starting to shake off 15 years of deflation.

Consumer prices excluding fresh food increased 0.4 percent in June from a year earlier, the statistics bureau said in a statement today. The median estimate of 29 economists was for a 0.3 percent gain, a Bloomberg News survey showed. Excluding energy as well, prices dropped 0.2 percent, continuing more than four years of declines.

As Prime Minister Shinzo Abe’s policies weaken the yen and energy costs rise, the increase in consumer prices could stoke inflation expectations and encourage companies and consumers to spend more, bolstering the economic recovery. After April’s unprecedented monetary easing, the next challenge for Abe is to loosen constraints on the labor market and companies to achieve sustained growth and a goal of 2 percent inflation.

“Japan’s economy is on the right track to pull out of deflation,” said Tomo Kinoshita, chief economist at Nomura Holdings Inc. in Tokyo. “The relatively large increase in prices should have a knock-on effect of enhancing consumer and business inflation expectations.”

The Nikkei 225 Stock Average slipped 2.1 percent in the morning session in Tokyo after dropping the previous two days. The yen rose 0.4 percent to 98.87 per dollar, the highest in 2 weeks.

Weak Yen

The large increase in the CPI was partly due to a comparison with a low level in June last year that was depressed by a decline in energy prices, said Kinoshita. The weak yen also lifted the cost of goods, said Ryutaro Kono, chief economist at BNP Paribas SA, before the data were released.

The yen lost almost 21 percent against the dollar in the past year, pushed down by the government’s calls for unlimited easing and the Bank of Japan’s April policy expansion. West Texas Intermediate oil prices have risen almost 36 percent since June 2012, when they fell to an almost two-year low.

“Oil prices are rising. There’s still a way to go, but I get the feeling things are moving a little away from deflation and toward inflation,” Finance Minister Taro Aso said today in Tokyo.

While the rise in consumer prices eliminates the need for further monetary easing for the time being, a planned increase in the consumption tax in April may prompt the central bank to take additional steps next year, said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo and a former BOJ official.

Milk, Mayonnaise

“The focus will be on what the BOJ will do to cope with a slowdown next year after the sales-tax hike,” Kanno said. “The BOJ may cooperate with the government by announcing additional measures,” probably increasing purchases of exchange-traded funds in January, he said.

Japanese companies have started to pass the increase in costs on to consumers. Meiji Holdings Co. announced this week it will raise milk prices by as much as 4 percent from October, citing higher costs on rising commodity prices and the yen’s fall. Other food companies such as mayonnaise maker Kewpie Corp. and Yamazaki Baking Co. announced price increases earlier this year.

Japan’s corporate services price index rose 0.4 percent in June from a year earlier, the most since the collapse of Lehman Brothers Holdings Inc. in September 2008, BOJ data showed yesterday. Hotel accommodation and engineering services were among the costs that increased.

Citigroup Inc. said it expects consumer prices to rise at a faster pace of around 0.5 percent in July and August from a year earlier, with the increases easing from September.

Inflation Expectations

A growing number of Japanese expect inflation to gain traction, with a BOJ report on July 5 showing 80.2 percent of people it surveyed expect prices to rise in the next 12 months, the highest since September 2008.

Absent an increase in personal incomes, higher consumer prices would reduce the spending power of households, weighing on consumption. Wages haven’t risen in Japan on a sustained basis since the bursting of the asset bubble in the early 1990s, as companies focused on fixing balance sheets and consumers reined in spending. Labor cash earnings fell 0.1 percent in May from a year before.

Abe has launched monetary and fiscal stimulus and steps to make it easier to do business -- a policy mix dubbed Abenomics - - in a bid to boost the economy and end deflation that has been driven by sluggish demand, excess capacity and a shrinking population.

Wage Growth

After growing up amid deflation, Tetsuro Yoshida, 22, isn’t sure if inflation is good for the economy yet, with his friends having a hard time finding jobs and with a lack of prospects for a pay increase at his part-time job.

“I’m cautious,” Yoshida said. “I hope Japan recovers in a way that allows non-wealthy people to benefit.”

About 40 percent of Japanese said their life is tough economically, according to a survey of 21,173 households by the National Institute of Population and Social Security Research released on July 24.

“We must have wage growth to make inflation sustainable but it could be a slow process as business executives must have forgotten how to increase pay after decades of deflation,” said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management Co. in Tokyo.

Elsewhere in the world, a gauge of consumer confidence will be released in the U.S. today after a similar measure in South Korea stayed at a 13-month high. Data on Mexico’s trade balance and lending in Brazil are due, while Mexico will also release minutes from a monetary-policy meeting.