TOKYO: Japanese inflation fell back to zero in July while household spending dropped again, official data showed on Friday, as a slowdown in China threatens Japan’s already precarious economic picture.
The disappointing data are sure to stoke speculation that the central bank would be forced to unleash more stimulus later this year to counter a downturn in the world’s number-three economy, which contracted in the April-June quarter.
On Friday, government data showed core inflation, excluding volatile fresh food prices, was flat year-on-year, as lower fuel and other energy costs weighed on Tokyo’s battle to push up prices.
Household spending also fell 0.2 percent in July after declining 2.0 percent in the previous month, the ministry said.
The two monthly drops followed a strong rise of 4.8 percent in May that offered some hope for spending after consumers snapped their wallets shut in the wake of a sales tax hike last year.
The consumption levy rise—Japan’s first in 17 years—was aimed at taming a huge national debt but it slammed the brakes on consumer spending and pushed the economy into a brief recession.
While Japan crawled out of the red in the last quarter of 2014, the economy turned negative again with a 0.4 percent contraction in the second quarter due to a slowdown in China, weak consumer spending at home and slowing exports after two consecutive quarters of growth.
Analysts have pointed to China—a major trading partner with Japan—as a red flag amid worries over the health of the world’s number two economy and a Chinese stock market bloodbath that sent global bourses into a freefall earlier this week.
Japanese exports to China represented 18.3 percent of total shipments last year, in value terms, just behind 18.6 percent to the United States.
Economy ‘isn’t looking good’
More than half of Japan’s exports are to Asia and any hit to China is bound to affect other countries in the region, according to analysts at French bank Natixis.
“If we consider how intertwined other Asian countries are with China, it is obvious that China’s economic performance is even more important to Japan than that of the US, at least as far as trade is concerned,” they said in a report this week.