Ratio of Japan households expecting price hikes hits five-year high - Bank of Japan survey

TOKYO Fri Jul 5, 2013 10:29am BST

A man walks past the Bank of Japan headquarters in Tokyo July 5, 2013. REUTERS/Toru Hanai

A man walks past the Bank of Japan headquarters in Tokyo July 5, 2013.

Credit: Reuters/Toru Hanai

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TOKYO (Reuters) - More than 80 percent of Japanese households expect prices to rise a year from now, the highest ratio in nearly five years, a Bank of Japan survey showed, a sign the bank's pledge to spur 2 percent inflation with its aggressive asset purchases may be changing public perceptions that deflation will persist.

The quarterly survey also showed household sentiment on the economy improving to a seven-year high, suggesting that consumer spending may stay resilient despite tepid wage growth.

Just more than half of households said they feel prices have risen compared with a year ago, the highest level in nearly two years, according to the BOJ's survey on people's livelihood issued on Friday.

Of the respondents, 80.2 percent said they expect prices to be higher one year from now, up from 74.2 percent in the previous survey in March. The latest level is the highest since September 2008, when a spike in global commodity costs drove up gasoline and crude oil prices.

"It's hard to tell how much of the expectation is driven by rising costs of food and oil, and how much by monetary policy. But there's no doubt more households expect prices to rise ahead," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute in Tokyo.

"Wages may gradually start to rise early next year as corporate profits increase. That means the positive effect (of the BOJ's monetary easing) will gradually spread and support consumer spending," he said.

Reflecting the positive mood, the diffusion index gauging household sentiment on the economy improved 17.8 points to minus 4.8 in June, the best in seven years, the survey showed.

The index is calculated by subtracting the ratio of those who feel conditions have worsened from those who believe they improved. A negative reading means pessimists still outnumber optimists.

The BOJ stunned markets in April by offering an intense burst of monetary stimulus, pledging to double its holdings of government bonds and boost purchases of risky assets to meet its target of achieving 2 percent inflation in two years.

Expectations of aggressive money printing by the BOJ helped weaken the yen, while hopes that Prime Minister Shinzo Abe's reflationary policies will end decades of deflation and economic stagnation drove up Tokyo share prices.

With the weak yen supporting Japanese exports and consumer spending on the rise, the BOJ is likely to revise up its assessment of the economy next week to signal that it is recovering.

ANOTHER POSITIVE INDICATOR

Separate government data on Friday showed an indicator measuring current economic conditions, used to determine whether the economy is expanding or contracting, rose in May for the sixth straight month. That led the government to raise its assessment on the index, also suggesting that the economy has already recovered.

Rising energy and food prices, mostly due to the weak yen that inflates the cost of imports, have already affected overall prices. Core consumer prices stopped falling in May, for the first time in seven months.

But wage growth remained flat in May for the second straight month, casting doubt on whether the recent strength in consumer spending is sustainable.

In the BOJ survey, more than 80 percent of those who expected prices to rise said such a development was undesirable, suggesting that many households still doubt whether wages will rise fast enough to meet higher living costs.

The BOJ's survey has gained importance as among the few indicators to gauge inflation expectations in Japan, because the central bank's current policy framework emphasizes the need to change public perceptions that deflation will persist in spite of aggressive monetary stimulus.

The latest survey, conducted from May 10 to June 5, targeted 4,000 households, of which 2,273 replied.

(Editing by Richard Borsuk)

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