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The challenge facing Japan’s new leadership in escaping from economic stagnation and deflation was underscored on Friday as data showed further declines in consumer prices and an unexpected contraction in factory output.
Haruhiko Kuroda, the new governor of the Bank of Japan, could struggle to reach his goal of generating 2 per cent inflation in two years, analysts said, after the government data indicated core consumer prices fell 0.3 per cent in February compared with a year earlier.
It was the fourth consecutive decline in core CPI, which excludes prices of fresh food. The fall came in spite of a more than 15 per cent fall in the value of the yen, which has pushed up prices for many items sourced outside Japan, from gasoline to package holidays.
“We believe the BoJ’s 2 per cent target is still a long way off,” said Chiwoong Lee, an analyst at Goldman Sachs, adding that it would take time before the impact of the weaker yen was felt on prices in general, rather than merely imports.
Mr Kuroda will lead his first BoJ policy-setting meeting next week following his appointment by Shinzo Abe, the prime minister, who was elected in December on a pledge to revive an economy that has managed to grow only about 0.5 per cent a year on average since the mid-1990s.
The BoJ’s board is expected to agree to pump more money into the economy by expanding its purchases of government bonds and other assets. Market expectations are high: the yield on 20-year bonds dropped to its lowest in 10 years this week after Mr Kuroda repeated a pledge to consider buying longer-dated debt.
In Februay, increased import costs were more than offset by large declines in prices for flatscreen televisions and other home electronics – a category that is under price pressure worldwide due to changes in technology and manufacturing processes that are beyond the BoJ’s control.
TV prices in Japan fell 29 per cent in February compared with the same month a year earlier.
The central bank’s ultimate aim is not simply to raise prices but to spur corresponding increases in corporate investment and wages. But the decline in industrial production in February was a reminder of the entrenched defensive mood at many companies: output was down 0.1 per cent, against analysts’ average forecast of a 2.6 per cent rise.
Masamichi Adachi, an analyst at JPMorgan, said the result suggested economic growth in the first quarter could be less buoyant than expected. Analysts believe Japan emerged from its fifth recession in 15 years in the quarter.
Mr Adachi said JPMorgan would review its estimate of 3 per cent annualised growth after the government releases its latest monthly survey of private consumption next week, but that “the risk clearly skews to the downside”.
Still, he said he believed the economic recovery would continue as the effect of BoJ easing, government stimulus spending and reviving overseas demand for Japanese goods became fully apparent beginning in the second quarter.
The industrial production data highlighted the challenge of turning the rise in optimism that has accompanied Mr Abe’s moves to fix Japan’s malaise into progress in the real economy. Factory managers who responded to the previous month’s survey had said they believed February output would soar by 5.3 per cent.
This time around, they predicted rises of 1 per cent in March and 0.6 per cent in April.
Haruhiko Kuroda, the new governor of the Bank of Japan, could struggle to reach his goal of generating 2 per cent inflation in two years, analysts said, after the government data indicated core consumer prices fell 0.3 per cent in February compared with a year earlier.
It was the fourth consecutive decline in core CPI, which excludes prices of fresh food. The fall came in spite of a more than 15 per cent fall in the value of the yen, which has pushed up prices for many items sourced outside Japan, from gasoline to package holidays.
“We believe the BoJ’s 2 per cent target is still a long way off,” said Chiwoong Lee, an analyst at Goldman Sachs, adding that it would take time before the impact of the weaker yen was felt on prices in general, rather than merely imports.
Mr Kuroda will lead his first BoJ policy-setting meeting next week following his appointment by Shinzo Abe, the prime minister, who was elected in December on a pledge to revive an economy that has managed to grow only about 0.5 per cent a year on average since the mid-1990s.
The BoJ’s board is expected to agree to pump more money into the economy by expanding its purchases of government bonds and other assets. Market expectations are high: the yield on 20-year bonds dropped to its lowest in 10 years this week after Mr Kuroda repeated a pledge to consider buying longer-dated debt.
In Februay, increased import costs were more than offset by large declines in prices for flatscreen televisions and other home electronics – a category that is under price pressure worldwide due to changes in technology and manufacturing processes that are beyond the BoJ’s control.
TV prices in Japan fell 29 per cent in February compared with the same month a year earlier.
The central bank’s ultimate aim is not simply to raise prices but to spur corresponding increases in corporate investment and wages. But the decline in industrial production in February was a reminder of the entrenched defensive mood at many companies: output was down 0.1 per cent, against analysts’ average forecast of a 2.6 per cent rise.
Masamichi Adachi, an analyst at JPMorgan, said the result suggested economic growth in the first quarter could be less buoyant than expected. Analysts believe Japan emerged from its fifth recession in 15 years in the quarter.
Mr Adachi said JPMorgan would review its estimate of 3 per cent annualised growth after the government releases its latest monthly survey of private consumption next week, but that “the risk clearly skews to the downside”.
Still, he said he believed the economic recovery would continue as the effect of BoJ easing, government stimulus spending and reviving overseas demand for Japanese goods became fully apparent beginning in the second quarter.
The industrial production data highlighted the challenge of turning the rise in optimism that has accompanied Mr Abe’s moves to fix Japan’s malaise into progress in the real economy. Factory managers who responded to the previous month’s survey had said they believed February output would soar by 5.3 per cent.
This time around, they predicted rises of 1 per cent in March and 0.6 per cent in April.
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