Japanese household’s inflation expectations slow in October

FXStreet (Mumbai) - The Cabinet Office survey of Japan published in mid-October showed weaker inflation expectations among households. According to the survey, with data broken down by Nomura’s Strategist Yujiro Goto, only 80% of households expect prices to increase over the next 12 months, a dip from September’s 85% in September. Estimated inflation expectations slowed to 2.49% in October from 2.73% in September. October’s inflation expectations are the lowest since at least April 2013. At the same time Inflation expectations among bond investors also declined in October. The Bank of Japan said medium- to long-term inflation expectations appeared to rise on the whole from a longer-term perspective, and the slowdown in inflation expectations may not lead to its policy BOJ easing.

Abenomics has not helped to raise inflation

Abenomics, and other Japanese economic policy stances prior to Abenomics, have over the decades struggled to raise inflation. None of the measures yielded positive results and inflation still lags. Recent attempt of Abenomics to artificially boost inflation by slashing sales tax failed to prove effective.

The Bank of Japan had extended its annual asset purchases last October with an objective to remove the downside risks facing Japan’s inflation expectations. BOJ governor Kuroda’s efforts to dispel “deflationary mind-set” was rendered a blow by a combination of weak growth, mixed price data as well as reluctance on part of the companies to change their behaviour. Companies are usually slow to increase investment and wages and in the absence of increase in wages the central bank will stand a chance to miss its 2% inflation target.

Companies’ inflation weakened sharply in Q3

The central bank’s September survey of about 10,000 companies showed that the Japanese companies’ inflation weakened sharply for the third quarter signalling once again that the central bank is faltering in achieving its inflation goals. Firms had predicted annual inflation on consumer products to reach around 1.2% in one year’s time, lower than the previous forecast in June of a 1.4% increase. Companies cut their price projections as well for three and five years down the line. Companies currently expect consumer prices to rise 1.4% in three years compared with a previous projection of a 1.5% increase, recording a dip for the second straight quarter, the survey showed. Firms see prices gaining 1.5% in five years, also below the previous forecast for a 1.6% gain.

Should BOJ opt for further easing?

Weaker inflation expectations coupled with signs of a slowdown in actual inflation even after excluding energy may pave way for BOJ easing into 2016. Escalating the easing measures might not help. As was seen in the last two years, injecting record amount of cash into the economy did little to raise inflation numbers countering what Kuroda had said to influence consumer mind-set.
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