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Economy

Election called amid lack of progress in beating deflation

3 out of 4 inflation indicators show Japan underperforming

Gains in Japanese consumer prices have remained static for several months.   © Reuters

TOKYO -- Japanese Prime Minister Shinzo Abe vowed to "maximize the speed" at which this country escapes deflation, when he announced Monday a snap election for the lower house.

Abe has every reason to be urgent since his government is missing the mark in this area on three counts.

The government employs four key benchmarks when grading reflationary measures, with one being a consumer price index that excludes fresh food and energy prices. However, the year-on-year change has stalled near 0% for several months.

The gross domestic product deflator, which reflects price trends as a whole, shows a 0.4% contraction on the year for the April-June quarter. The indicator has retreated for four straight quarters. In addition, the unit labor cost continues to hover at around 0%.

The one measure that barely receives a passing grade is the GDP gap, which highlights the balance between demand and supply. Demand won out by 0.5% during the second quarter of the year, marking an added improvement from a positive first quarter.

"We're finally able to resolve the shortage of demand," said Taro Saito at the NLI Research Institute. "If [the GDP gap] continues to improve, it will work inflation further into the plus side."

For the first time in 11 years, the Japanese economy has enjoyed six quarters of sustained expansion, through June. However, the gains in economic growth potential have yet to match GDP growth.

This country's potential GDP growth rate compared to the prior quarter was an annualized 1% during the April-June period, according to Cabinet Office estimates. The rate stood at 0.8% when Abenomics went into effect nearly four years ago.

Based on estimates by the Organization for Economic Cooperation and Development, Japan's potential growth rate wallows at 0.7%, well below 1.5% for the U.S. and the 1% range for the U.K, Germany and France.

The 2% inflation target remains ever remote. The composite consumer price index shared by the central government and the Bank of Japan shows prices rising 0.4% on the year in July, a level unmoved for four straight months. That forced the BOJ to push back the timeline for achieving the inflation goal for the sixth time.

The Abe government is attempting to shift the spending focus toward education and improving productivity, and away from lifting demand. However, efforts to ensure economic growth via regulatory reform and other means are lacking.

Such reforms include but are not limited to deregulated "sandboxes" for testing new innovations, increased flexibility to hire workers at high value-added industries, and an expanded intake of foreign talent. However, the coming snap election will interrupt work on those initiatives for at least a month.

(Nikkei)

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