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Corporate Japan expects small inflation rise over next 12 months

Corporate Japan expects small inflation rise over next 12 months

Japanese businesses are only expecting a modest inflation rise during the next 12 months and think that inflation will remain at near-current levels for up to five years, a new survey published by the central bank has found.

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By Staff Journalist 04.07.2018

Japanese businesses are only expecting a modest inflation rise during the next 12 months and think that inflation will remain at near-current levels for up to five years, a new survey published by the central bank has found. The data, published on Tuesday, suggests that the bank is finding it challenging to meet its price target.

Meanwhile, the most recent Tankan report revealed that business confidence in Japan slipped during the second quarter, but expert economists refuted suggestions that a “recession phase” is nigh. They added that while economic expansion is slowing, the reading of 21 among major manufacturers is still a positive indicator overall. 

The Bank of Japan’s new survey found that domestic corporations believe that prices will have increased by just shy of 1% this time next year, which is still slightly ahead of the projection made following the first quarter of the year in April.

Enterprises also expect consumer prices to remain relatively steady in the long term with an annual hike of 1.1% in 2021 and the exact same figure five years from now. These figures are the same as the predictions from three months ago and suggest overall that confidence shows no signs of strengthening in the coming months.

"The BOJ will try to explain why inflation is not picking up when it next meets, but the reality is wages are not rising much, and some people are not confident in the outlook," Shuji Tonouchi, a senior market economist for Mitsubishi UFJ Morgan Stanley Securities said. "This means the BOJ will keep policy on hold for now."

The central bank will convene at a meeting later this month to complete a review of its projections. It will also take a closer look at the current state of consumer prices and try to determine whether the weaknesses highlighted in recent weeks are temporary or more of a long-term problem.

The BOJ has a history of taking active measures to improve the economy. It deployed a widespread stimulus program five years ago with the aim of driving more consumers to shake off a deflationary mindset and boosting inflation expectations for both corporations and households. Similar tactics could take place following the meeting on 31 July.

Price growth has been a problem for the BOJ before, and it overhauled its policy framework two years ago to improve how it battles against long-standing deflation. Despite that move, it has struggled to make a difference and results have been modest overall.

Japan’s core consumer price index covering oil products saw a small 0.7% year-on-year rise in May, which suggests that inflationary pressure is not on the rise. The news on Tuesday comes in the wake of the less-than-stellar reading from the Tankan report, though economists are not yet worried that the third-largest economy in the world may be stalling.

“The second straight quarterly decline is certainly not good, but the level of [business confidence] is still high," Dai-ichi Life Research Institute economist Yoshiki Shinke said. "We are not facing a recession phase, but the pace of economic expansion is slowing down."

Confidence among retailers also decreased, and Shinke admitted that this is a “slight concern”. He added: "Consumption is not that bad but is not strong enough to lead the economic expansion. 

Tokyo stocks closed lower on Tuesday as China’s frictions with the United States took its toll on the region. The benchmark Nikkei 225 Index contracted by 0.12%, while the Topix Index saw a 0.15% downturn. Stocks did start brightly, but concerns among investors meant that selling prevailed later in the day.

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