The Japanese price statistics which were published this morning do not look unfavorable. Even the slowest observer should have worked out by now that the effect of the VAT hike in 2014 is disappearing from the May statistics for Tokyo and almost disappearing from the national April data. Adjusted by this effect the national data looked promising. The underlying inflation trend is clearly pointing upwards.
Commerzbank calculates an exponentially weighted moving average with 9 month average lag length from the seasonally adjusted mom rates. Based on this approach the impressive figure of 0.7% (annualized) has been recorded.
However, the Tokyo data dampens the picture somewhat. The May data available for this area already depicts a fall of the inflation trend. Tokyo is not always a good indicator for national inflation developments. So therefore there is a vague hope that price developments will at least point upwards slightly.
"The 2% inflation target continues to seem out of reach - certainly within the space of time envisaged by the Bank of Japan (BoJ) - i.e. mid-2016. For the time being the BoJ will be able to use the data to celebrate its alleged success rather than having to consider additional monetary policy steps", said Commerzbank in a report on Friday.
However, without inflation and growth the Japanese Treasury will struggle to stabilize the budget long term.
Understandably Finance Minister Taro Aso stressed this morning that it may put pressure on Japanese government bonds if the medium term budget target was going to be missed. Unusual openness for a Minister of Finance.
However if the Japanese government really does want to eliminate the primary budget deficit it is facing a difficult task, added Commerzbank. The fact that Aso excludes a reduction in spending does not exactly seems optimistic.
