Slower Japan Inflation Highlights BOJ’s Reflation Task: Economy

Japan’s inflation slowed in June, highlighting the task Bank of Japan Governor Haruhiko Kuroda faces in reaching the bank’s target.

Consumer prices excluding fresh food rose 3.3 percent from a year earlier after a 3.4 percent gain in May, the statistics bureau said today in Tokyo. The increase matched the projection in a Bloomberg News survey of 32 economists.

Kuroda has said inflation will ease in coming months before accelerating later this year toward the BOJ’s 2 percent goal, which strips out the effects of a sales-tax increase in April. As the impact of the yen’s slide on prices fades, some economists say the central bank may add stimulus should price gains drop below 1 percent -- a level Kuroda forecast they wouldn’t break.

“There are factors that will reduce upward pressure on prices, challenging the BOJ’s projection,” Takeshi Minami, chief economist at Norinchukin Research Institute Co. in Tokyo, said after the report. “Exports are weak, the recovery in consumption has been slow and real incomes aren’t growing. The situation is quite severe.”

The BOJ estimated the 3 percentage point increase in the sales levy added 2 percentage points to core inflation in May.

The yen has strengthened about 3.5 percent against the dollar this year after a 18 percent decline in 2013 raised prices of imported energy and other goods. The Japanese currency rose 0.1 percent to 101.76 as of 1:26 p.m. in Tokyo, while the Topix index of stocks rose 0.4 percent to extend its weekly advance.

Electricity Prices

A slowdown in electricity price gains to 9.9 percent from 11.4 percent in the previous month dragged on core inflation, a government official said today.

Overall inflation was 3.6 percent, and 2.3 percent excluding perishables and energy. Fresh seafood prices rose 15 percent, and gasoline gained 10.6 percent.

“The data suggest that firms have now mostly passed on the higher sales tax, and inflationary pressure has started to diminish,” Marcel Thieliant, a Singapore-based economist at Capital Economics, wrote in an e-mailed note today. Underlying inflation will fall below 1 percent in coming months, he said.

Norinchukin’s Minami said the central bank will have to consider adding to its unprecedented easing if core inflation drops below 1 percent.

BOJ board member Sayuri Shirai said this week that Japan is showing signs of moving out of deflation and that the bank sees inflation on a rising trend from the second half of the current fiscal year.

Thirty-eight percent of economists in a Bloomberg survey this month predicted additional stimulus this year, dropping from 59 percent in June.

Real Income

Income growth is failing to match inflation. Wages excluding overtime payments and bonuses were unchanged in May from a year earlier.

Regular gasoline prices were the highest since September 2008 as of July 14, according to the trade ministry.

Falling real income is “going to weigh on consumption in the second half of the year,” Izumi Devalier, Japan economist at HSBC Holdings Plc in Hong Kong, said yesterday on Bloomberg TV. “It’s not looking good for Japanese consumers right now.”