From a consumer’s perspective, inflation is always a bad thing. Customer’s like to see prices remain flat or even fall, but from the perspective of a central banker, falling prices over the longer term, deflation, is bad news. The reason for this is simple: if consumers know that goods will be cheaper at a future date, they put off expensive purchases for as long as possible. This stifles domestic demand which is usually the dominant term in any economy.
For many years, Japan has been struggling with deflation. A central policy of Prime Minister Abe’s administration is to stimulate the sluggish Japanese economy, partially through monetary policies but also by spending on infrastructure projects. A key part of this is to restore, stable, low inflation into the Japanese economy. The Bank of Japan is targeting an inflation rate of 2%. However, this is proving difficult to achieve.
The Japanese “core” consumer price index which measures inflation for a range of items including fuel costs but excluding fresh foods, has dipped by 0.1% from its level a year earlier in August. The decline is the first seen for more than two years. Another measure of inflation, the headline consumer price index did increase by 0.2% from last August, but was flat month-on-month from the July level. In any event, the level is very far from the target level, but at least it remains in inflation rather than deflation territory. The Bank of Japan had hoped to hit the 2% target figure in the first half of next year, but this looks increasingly unrealistic.
A factor which will have influenced the core inflation figure will be the continuing decline in international crude oil (and related) prices, a factor outside of Japanese control. Japan must import virtually all of its crude oil and gas needs from abroad. These items are priced in Dollars, so the recent strengthening of the Yen against the Dollar will have further softened the price paid in Japan when the currency is converted.
Some analysts expect the Bank of Japan to further ease its monetary policy partially as a result of the weaker inflation figures, but also as a counter to weakening demand caused by the slowdown of the Chinese economy.