–Sliding Energy Prices, Government-Led Travel Discounts Cited
By Max Sato
(MaceNews) – Consumer prices in Tokyo, a leading indicator of the national average, took the deepest dive in a decade in December, hit by falling food and energy prices as well as a controversial five-month-old government program to support the pandemic-hit tourism industry with hefty hotel and transport discounts, data from the Ministry of Internal Affairs and Communications released Friday showed.
The annual inflation rate is slipping closer to a danger zone around a 1% fall, away from the Bank of Japan’s 2% price target set in January 2013. The central bank has been patiently printing massive amounts of cash and buying government debt under its aggressive monetary easing campaign launched more than eight years ago.
Government leaders are refusing to admit it but some health experts and economists point to some evidence showing that the “Go To Travel” campaign is responsible for causing a spike in new coronavirus cases as people move across the prefectures. The government of Prime Minister Yoshihide Suga is under public scrutiny over how it handles the drag from the pandemic while guiding the economy’s fragile recovery.
The key points from the CPI data:
* The core consumer price index (excluding fresh food) in the capital’s 23 wards recorded the sharpest drop in more than 10 years in December, down 0.9% on year, as largely expected. It was the fifth straight month of year-on-year decline after falling 0.7% in November, and the largest decrease since the -1.0% in September 2010, when Japan was mired in years of deflation.
* For the whole of calendar 2020, the core reading was unchanged from last year, when it posted the third consecutive annual rise, up 0.9%
* The core-core CPI (excluding fresh food and energy) – a key indicator of the underlying trend of inflation – slipped 0.4% on year in December for the third y/y fall in a row after sliding 0.2% in November.
* The total CPI plunged 1.3% after falling 0.8% in November as prices for fresh food (vegetables, fruits and fish) pushed down the total index by 0.24 percentage point. It was the biggest slump since -1.4% recorded in May 2010. The overall index first posted a year-over-year decrease in three years in October as the base-year effects of the October 2019 sales tax hike to the current 10% from 8% faded. The total CPI rose 0.1% in calendar 2020, the fourth straight annual rise after +0.8% in 2019.
* The biggest factor behind the sharper declines in both the total and core readings remained energy costs (particularly electricity and city gas), which have been sliding from year-earlier levels, down 10.2% and lowering the total index by 0.53 percentage point (vs. -8.9%, -0.47 point in November).
* Processed food prices slipped 0.2% on year in December after edging down 0.1% in November, which was the first year-on-year fall in seven years. They trimmed the total CPI by 0.05 percentage point after -0.02 point the previous month.
* Accommodations prices slumped 33.5% in December, trimming the total CPI by 0.53 percentage point, due to the government-subsided domestic travel support program. But the pace of the decrease continued decelerating from -34.4% (a 0.55-point negative contribution) in November and -37.1% (-0.59-point) in October as some people became cautious about traveling outside of their cities amid rising cases of infections.
* There were a couple of temporary factors that led the larger year-on-year drops in consumer prices. Prices for mobile phones fell 4.5% on year in December, trimming the total CPI by 0.03 percentage point, after rising 0.3% and making no contribution to the index. This was in reaction to the introduction of new models of Android smartphones in December 2019, which led to overall markups in mobile phone prices then. Golf club prices rose 1.2% in December after surging 50.0% because their prices picked up in December 2019, with new products hitting the market at the time after a constant decline through November last year.
BOJ warns of prolonged pandemic impact
At its latest policy meeting on Dec. 17-18, the BOJ board decided to extend the period of increased financial asset purchases and special funding operations aimed at promoting more lending to cash-strapped small businesses by six months until the end of September 2021.
“Japan’s economy has picked up, but the pace of improvement is expected to be only moderate while vigilance against COVID-19 continues,” the BOJ said. “In this situation, financing, mainly of firms, is likely to remain under stress for the time being.”
Depending on the future impact of COVID-19, the bank said, it will consider “further extension of the (fund-supplying) program if necessary.”
On the data front, Prime Minister Suga’s pet project of urging mobile carriers to bring down communications costs sharply may support household spending but at the same time, it will exert downward pressure on consumer prices, which could further delay the timing of the BOJ’s achieving its inflation target. Japan has never stabilized inflation around 2% in the past.
—
Contact this reporter: max@macenews.com.
Content may appear first or exclusively on the Mace News premium product. For real-time delivery contact tony@macenews.com. Twitter headlines @macenewsmacro.