Japan Racing to 2 Percent Inflation

Japan’s core inflation has returned for the first time in more than a year owing to increased energy prices, giving signals that the country is on its path to reach its inflation target of 2%.  Even though the unemployment rate dropped to 3%, its lowest level since 1990s, household spending saw a decline of 1.2%.

Increasing inflation is the center point of Japan’s economic growth strategy. The country is placing its bets on rising oil prices and a weaker yen to win its long standing battle against deflation. Expectations of a stronger US dollar are expected to make imports costlier for Japan and to push prices up at home, Nasdaq reported.

Given the current hawkish outlook of the Fed and increased probability of a rate hike soon in the US, the yen could go down against the greenback, and prove to be a relief for Japanese exporters.

The sustainability of price gains of domestic production is still unclear due to the declining levels of consumer spending. However, the environment seems to have been set for the economy to battle deflation.

Many analysts expect core consumer prices to head toward 1% later this year. But that would still be half-way to the Bank of Japan’s goal, which was put into perspective by separate data showing household spending slipped in January even as the job market tightened further.

“Inflation will accelerate this year due to a rebound in energy costs and the weak yen effect. But it will not heighten much next year unless wages spike and boost spending,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

“The hurdle for hitting 2% inflation remains very high, which means the BoJ will maintain its ultra-loose monetary policy for the time being,” he said.

The government began releasing from Friday a new index on consumer prices that excludes the effect of volatile fresh food and energy costs, which it says is useful in tracking consumer price trends that strips away one-off factors.

The index was up 0.2% in January from a year earlier, suggesting that recent yen declines are pushing up imported goods prices.

Low inflation in Japan, a phenomenon seen for much of the past two decades, remains the biggest hurdle to fostering a durable economic recovery—a goal that has eluded policymakers since the late 1990s.