Japan’s core consumer price index (CPI), which excludes fresh food, rose 3.1% in July from a year earlier, down from 3.3% in June, according to official data released on Friday. The latest figure stayed above the Bank of Japan’s 2% target for the 16th consecutive month, indicating that inflationary pressures remain high in the world’s third-largest economy.
The main drivers of inflation in July were food, furniture and household utensils, clothing, medical care, and culture and recreation. Food prices rose 8.4% year-on-year, slightly lower than the 8.6% increase in June, but still reflecting the impact of higher global commodity prices and supply chain disruptions caused by the COVID-19 pandemic.
Furniture and household utensils prices jumped 8.6%, up from 9.6% in June, as consumers spent more on home improvement and appliances amid prolonged social distancing measures. Clothing prices increased 3.9%, unchanged from June, as demand for summer apparel remained strong. Medical care prices rose 2.4%, higher than the 2.1% rise in June, as health care costs increased due to the aging population and the surge in coronavirus cases. Culture and recreation prices climbed 3.5%, up from 3.4% in June, as people spent more on leisure activities such as travel, sports, and entertainment.
In contrast, prices of fuel, light, and water charges fell for the sixth month in a row, dropping 6.6% year-on-year in July, compared to an 8.3% decline in June. The main reason for the decrease was the sharp fall in electricity prices, which plunged 12.4%, down from a 17.1% drop in June. This was due to the base effects of the high electricity prices in the same period last year, when demand soared amid a heat wave and supply was tight due to nuclear plant shutdowns.
Core inflation remains above BOJ’s target
Core inflation, which excludes fresh food and energy, also edged down to 3.3% in July from 3.4% in June, matching market expectations but staying outside the Bank of Japan’s (BOJ) 2% target for the 15th month. The BOJ has maintained its ultra-loose monetary policy stance since 2013, aiming to achieve stable and sustainable growth with price stability. However, despite its massive asset purchases and negative interest rates, the central bank has struggled to boost inflation and economic activity amid weak consumer spending and external headwinds.
The BOJ revised down its inflation forecast for the current fiscal year ending in March 2024 to 0.6% from 0.7% in its latest quarterly outlook report released in July. The central bank also lowered its growth projection for the same period to 3.8% from 4%, citing the impact of the state of emergency measures imposed to contain the spread of the coronavirus variants. The BOJ said it expects inflation to gradually accelerate toward its target as the output gap improves and inflation expectations rise. However, it also acknowledged that there are high uncertainties surrounding its outlook due to the pandemic and other global risks.
Households face squeeze on purchasing power
The rising inflation in Japan has eroded the purchasing power of households, who have already suffered from reduced income and employment opportunities due to the pandemic. According to a survey by the Ministry of Internal Affairs and Communications, the average monthly income of salaried households fell 0.5% year-on-year in June, while their spending dropped 5.1%. The decline in consumption was mainly attributed to lower spending on transportation, education, culture and recreation, and clothing and footwear.
The government has provided various fiscal stimulus measures to support households and businesses affected by the pandemic, such as cash handouts, tax breaks, subsidies, and loans. However, some analysts have argued that these measures are not enough to offset the negative impact of inflation on consumer sentiment and demand. They have also warned that if inflation continues to rise without a corresponding increase in wages and productivity, it could hamper Japan’s economic recovery and undermine its fiscal sustainability.