Japan CPI index is re-weighted every five years to reset any biases in the index and to adjust the weightings in order to reflect the current economic conditions. Japan CPI has been rebased to 2015 and July CPI figures will be the first figures released under the new index.
CPI excluding energy and food likely decelerated further to 0.3 percent y/y from 0.6 percent y/y in June under the new index. It is likely that CPI ex energy and food will also likely enter into negative territory in 4Q16, similar to CPI ex-fresh food. Decline in unemployment and increase in aggregate wages combined with the the effects of a strong yen adjusting and increase in inflation expectations has put Japan's inflation on a trend in the medium term of roughly 1 percent y/y.
Consumption tax hike weighed on Japan's real GDP growth for 2014 which was below the potential growth rate. Real GDP growth rate for 2015 and 2016 remains only around the potential growth rate, which has slowed the pace of increasing excess demand is likely a major cause for prices stagnating.
We expect July nationwide CPI (excluding fresh food) to be -0.5% yoy, the fifth consecutive month of negative growth. The effects of the fall in energy prices and yen strengthening continuing, CPI ex-fresh food will likely fall until the end of 2016, said Societe Generale in a report.
