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Economy

Japan's consumer prices show signs of picking up

Cabinet Office cites causes for optimism in fight against deflation

A woman walks out of a Tokyo shopping mall.   © Reuters

TOKYO -- There are encouraging signs that the pace of growth in Japan's consumer prices, a closely watched gauge of the nation's long-running fight against deflation, may finally pick up in the first half of 2018.

In a report on Jan. 18, dubbed the "mini economic white paper," the Cabinet Office said improvements in two key indicators -- the supply-demand gap, and prices of consumer goods in the corporate goods price index -- should push consumer prices up in about six months. Corporate goods prices are prices for goods traded between companies. Consumer goods include food and consumer electronics.

The supply-demand gap has swung into positive territory, and prices of consumer goods in the corporate goods price index jumped last summer.

Japan's current economic recovery began in December 2012, making it the second-longest since the end of World War II. Last September, it surpassed the 57-month "Izanagi Boom," which ran from November 1965 to July 1970 during the early years of Japan's high-growth period.

Thanks to the current extended recovery, changes in the prospects for emerging from deflation can "surely be seen," according to the mini economic white paper. The report covers developments since the release of the Cabinet Office's annual white paper on economic and fiscal policies in July 2017.

Still, growth in prices remains sluggish, as shown by the consumer price index, or CPI.

The core CPI, which excludes volatile fresh food prices, rose 0.9% in December from the same month a year earlier. For the whole of 2017, the CPI rose 0.5%. It was the first full-year gain in two years, but still well below the Bank of Japan's inflation target of 2%.

But there are positive signs, according to the mini economic white paper, citing higher charges by door-to-door delivery companies and noting that the "wave" of rising prices is spreading to consumer prices. It stressed the positive changes in the supply-demand gap and consumer goods prices in the corporate goods price index.

If the Cabinet Office's analysis is correct, these changes should be reflected in consumer prices in the first half of this year.

When supply tightens, prices tend to rise. Demand exceeded supply for the first time in two years in the April-June quarter of 2017. In the July-September quarter, the supply-demand gap stood at 0.7%, the highest since just before the consumption tax rose to 8% from 5% in April 2014.

Higher consumer goods prices in the corporate goods price index should also spur consumer prices, the report said.

The consumer goods price trend emerged from negative territory for the first time in 19 months in April 2017, and prices have been increasing by around 1% year on year since July.

Yet it is unclear whether the rising price trend will last, given that trends in the prices of services -- which account for about half of the CPI -- are significantly affected by labor costs. Many analysts think it will be difficult to achieve the 2% inflation target in the near term.

Prices of services in the CPI inched up only 0.07% year on year during the July-September quarter of 2017 from a year earlier, well below a range from the upper 1% level to the 2% level in the eurozone and the U.S. Prices of goods in the CPI climbed 1.21% in the same period.

The passing of higher corporate goods prices onto consumers will likely be limited, said Haruka Ono, a senior economist at Mizuho Research Institute, "partly because many people remain budget-minded."

Rather, for Japan to pull out of deflation, it needs to create a self-sustaining cycle of higher wages and productivity, starting with higher pay increases at this year's annual spring wage negotiations.

"The labor supply has been tightening and companies have been making profits," said Takuya Hoshino of Dai-ichi Life Research Institute. "Theoretically, companies can raise wages sufficiently."

But it is unclear how companies will respond to calls for higher pay increases. If wage growth is to continue to accelerate, productivity will also have to be enhanced, said Shunsuke Kobayashi of Daiwa Institute of Research.

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