While economic growth is faltering, inflation remains nowhere in sight. The latest data revealed that yearover- year in August, the core CPI rate had actually declined by 0.1 percent.
“Essentially Japan is still experiencing deflation, and that’s preventing the BOJ from hiking rates,” says David Powell, senior analyst at Ideaglobal in New York. “Japan has not been able to revive domestic demand very well. Incomes have not been rising along with the tightness in the job market, which constricts consumer spending and is the weakest link in the Japanese recovery.”
Looking to 2008, Moody’s Economy.com’s Robinson does not think inflation will emerge at any significant level.
“High crude oil, as well as higher food prices across Asia, will put upward pressure on consumer and producer prices in the months ahead, eventually feeding into core inflation measures,” he says. “The recent appreciation of the currency will counteract this, dampening any imported inflationary pressures, while the subdued state of the consumer sector will ensure that demand pressures remain too weak to put any real upward pressure on prices. Even if Japan can break from deflation, any rise will be small.”
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