Despite the BoJ's commitment to the 2% price stability target, inflationary pressure in the economy has stalled due to the decline in oil prices and sluggish demand after the consumption tax (CT) hike. The CPI (ex fresh food) finally fell below 0% yoy in August. Firm economic sentiment, supported by Abenomics, has been a driving force behind Japan's progress toward exiting deflation. However, the real economy (including exports, production and GDP growth) and inflation have been much weaker than economic sentiment.
"Should this continue, the government and the BoJ's strong commitment to the 2% inflation target will be open to question. If the market and corporates are disappointed, economic sentiment will deteriorate and there will be no driving force to ensure an exit from deflation. This could be a big risk to the Japanese economy", states Societe Generale.
Government and BoJ policies must aim to support economic sentiment until the real economy and inflation strengthen. Consumer sentiment has remained weak due to the CT hike in April 2014, and a further CT hike will be implemented in April 2017, added SocGen. In addition, there is rising uncertainty surrounding external factors such as China. A complete exit from deflation is very close, but the immediate road ahead is rocky.
