TOKYO: Japanese Prime Minister Shinzo Abe’s faltering bid to conquer years of deflation received a fresh blow on Friday as official data showed consumer prices fell for the first time in more than two years.
The decline comes just a day after Abe pledged to refocus on his “Abenomics” growth project, following months of divisive debate over new rules for pacifist Japan’s military.
The 0.1 percent fall in so-called core inflation—not including volatile fresh food—was the first since April 2013, and underlines Tokyo’s struggles to turn around years of stagnant or falling prices that have weighed on the world’s number three economy.
While lower prices are good for individual shoppers, they are bad for the wider economy because they tempt consumers to put off purchases in the knowledge products will be cheaper in the future.
That, in turn, discourages firms from investing and ultimately pulls down wages. Japan has suffered two decades of stagnant or falling prices.
The consumer price decline in August came after inflation fell to zero in July, as weak domestic demand and plunging energy prices weighed.
Abe’s government on Friday tried to play down the weak inflation reading.
“It is clear what weighed on the data—lower energy prices,” said economy minister Akira Amari.
“When you exclude energy, consumer prices are on an upward trend. You can read into the data as the index is rising.”
Abe’s drive had appeared to offer the promise of a turnaround, but a slew of recent data suggest it is faltering.
Standard & Poor’s cut its sovereign credit rating on Japan last week, saying the government has little chance of reinvigorating the moribund economy in the short term, with social welfare costs spiralling.
Friday’s data may also stir speculation that the Bank of Japan will be forced to unleash more stimulus to counter the downturn.
Abenomics ‘second stage’
Japan’s economy contracted in the second quarter owing to a slowdown in China, weak consumer spending at home and soft exports.
“The drop in prices brings more unpleasant news for the BoJ,” Masamichi Adachi, an economist at JPMorgan Chase and a former Bank of Japan official, told Bloomberg News.
“It’s getting harder to defend keeping policy unchanged.”
For more than two years Abe has pushed a huge spending blitz and monetary easing drive—dubbed “Abenomics”—to inject life into the economy.
The program helped sharply weaken the yen, sparking a stock market rally and lifting exporters’ profits, but the impact on the wider economy has fallen short of expectations.
The central bank’s 80 trillion yen ($665 billion) annual asset-buying scheme was a key pillar of Abe policy, although he is struggling to make good on pledges to cut red tape and open up the economy.
Marcel Thieliant of Capital Economics speculated the BoJ will launch more stimulus by next month.
“A sluggish economic recovery and anaemic wage growth suggest that price pressures are unlikely to strengthen much further form here on,” he said in a commentary. In currency trading the yen weakened, with the dollar buying 120.50 yen Friday, against 129.29 yen in New York, while the euro was at 134.42 yen from 134.36 yen.
The prime minister, however, has insisted he has brought Japan “to a state of almost no longer being in deflation.”
Speaking Thursday, he said his government will go ahead with raising sales taxes to 10 percent in 2017.
A sales levy rise to 8.0 percent from 5.0 percent last year—aimed at taming Japan’s
massive national debt—hammered consumer spending and pushed Japan into a brief recession. “From this very day, Abenomics is entering the second stage,” Abe told reporters, adding that his long-term goal was to boost the size of Japan’s economy by 20 percent from its current level.