Japan’s prices tick higher following sales tax hike

Summary:

• Core inflation in the Japanese economy ticked up in October
• A rise may have had something to do with a sales tax hike introduced that month
• Underlying trends remain little changed, illustrating the difficulty of the BoJ in lifting prices

Although headline price growth in the Japanese economy remained intact last month, we saw a slight upward move in the case of core prices which may have had something to do with a 2 percentage point sales tax hike. Headline inflation stood at 0.2% in annual terms in October, while core inflation excluding fresh food ticked up to 0.4% from 0.3% and the core index stripping out fresh food and energy jumped to 0.7% from 0.5%. Overall, all readings were very close to market expectations. On the other hand, when excluding effects of a sales tax hike in October as well as government measures to make pre-school education free, we actually got a further slowdown in price growth there. All in all, the data underlines the Bank of Japan is still way off from reaching its desirable price target at 2%, and it is highly probable that it will be the case in the foreseeable future. 

However, from a pure economic point of view one may note that a lack of any notable price increases following a sales tax increase is a welcome development. Keep in mind that there was a spike in prices to 3.4% in 2014 when Japan increased sales tax to 8% from 5%. At that time, consumer spending plunged and the overall economy contracted sharply. This time an estimated slowdown caused by higher sales tax is much lower, in part, thanks to a set of measures implemented by the government.

There was only an uptick in prices following another sales tax hike. Source: Bloomberg