Japan’s CPI likely stalled in January, core CPI likely to remain negative until mid-2016

Japan's CPI, excluding fresh food, is expected to have decelerated in January to 0.0% y/y, after recording positive growth of 0.1% y/y in November and December 2015. Indeed, certain factors are trying to help accelerate inflation, such as passing on of price growth to products due to cost-push inflation caused by the decline of yen in the past.

The core CPI, excluding fresh food, continues to be around 0% because of dropping oil prices. However, CPI, excluding energy and fresh food, likely accelerated 0.8% y/y in January, as compared with 0.9% y/y in December. However, the issue here is that the inflation is not accelerating towards the Bank of Japan's target rate of 2%.

The country's economic growth was 0.4% in 2015 after posting a weak growth in 2014 due to hike in consumption tax. Japan is now likely to post a stronger growth rate of more than 0.5% in 2016 due to the impacts of economic stimulus measures and monetary policy, a temporary increase in domestic demand before the next hike of consumption tax, growth of aggregate wages because of tight labor market and growth of corporate profits on the back of rebounding terms of trade.

The above mentioned factors should help the economic growth in 2016, provided there is no global economic recession and that the strengthening of yen does not continue for a longer period of time. However, the inflation pace is likely to be slower than expectations, even if oil price stabilises, because the pace of growth in excess of demand over supply is expected to be delayed.

Japan's consumer confidence continues to be weak as the consumption tax was raised before a strong rise in wage increases. With several people still trying to recover from lower consumer confidence, inflation continues to be strong in certain areas, particularly food prices. According to the household survey, consumers continue to be defensive because of the next hike of consumption tax that is scheduled for April 2017.

According to BoJ policy board member Yutaka Harada, the consumption tax rise has pushed the prices down and also the economy at the same time. Moreover, the impact of further drop in oil prices in the second half of 2015 should be seen in the CPI figures of January.

"Therefore, core CPI (ex fresh food) is likely to remain in negative territory (yoy %) until mid-2016. If oil prices remain at the current level, such a base effect will weaken and the CPI could pick up to +0.5% yoy by the end of 2016", says Societe Generale.