Japan’s consumer prices for last month rose 3.2 percent from the previous year to the highest level since 1991, the government said yesterday, largely due to a sales tax increase that is expected to dent growth this quarter.
Other data for last month were largely in line with forecasts. Industrial production fell 2.5 percent from the previous year and household spending sank 4.6 percent. Unemployment was 3.6 percent, the same as in March.
Last month, Japan raised its sales tax to 8 percent from 5 percent. The Bank of Japan (BOJ) estimates that 1.7 percentage points of the inflation rate last month could be attributed to the tax hike. The 3.2 percent figure is for the core consumer price index, which excludes fresh food.
RECOVERY AT RISK
In its latest assessment of Japan’s recovery, the IMF said yesterday that Japan appeared to be weathering the sales tax increase and exports are expected to begin picking up as demand overseas rebounds.
It forecast that inflation would remain modest at 1.1 percent this year, but it cautioned that Japan needs deep, structural reforms to support growth.
“Near-term risks to the outlook are balanced, but the sustainability of the recovery over the medium term is at risk,” the IMF said.
The Bank of Japan may need to keep up its stimulus drive for an “extended period,” it said.
Fears that a recent sales tax rise would dent a recovery in the world’s No. 3 economy have boosted speculation that the Bank of Japan would be forced to expand its monetary easing campaign to counter any downturn.
The Washington-based IMF said that the bank’s target to reach 2 percent inflation by next year — aimed at conquering years of falling prices which held back growth — would most likely be reached by 2017 instead.
QUICK ACTION
“The BOJ should act quickly if actual or expected inflation stagnates or growth disappoints,” the IMF said in its annual review of Japan’s economy. “The current aggressive pace of monetary easing may need to be maintained for an extended period.”
Economists say wage increases are needed to ensure the strong consumer demand that would prompt companies to begin investing more for future growth.
Shortages of labor in some areas, such as construction and trucking, have been pushing prices and, to a limited extent, wages higher, but so far overall incomes have not kept pace with the tax hike and price increases.
Prices in Japan rose partly due to higher costs for energy as the yen weakened against the US dollar because of massive monetary easing. Many businesses raised prices or offered less for the same price to compensate for their own higher costs.
CRUCIAL DEMAND
Revving up consumer demand through stronger purchasing power will be crucial, said Stephan Danninger, Asia and Pacific division chief for the IMF.
“The need for inflation to be meaningful in contributing to a stable and faster growing economy is through demand, and not through the input of higher prices,” Danninger told a seminar in Tokyo yesterday.
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