TOKYO (Reuters) - Japan’s consumer prices stopped falling in May and labour demand reached its strongest level in five years, but the Bank of Japan’s time frame for achieving a 2 percent inflation target still appears unlikely.
Industrial output rose at its fastest pace since 2011, in a sign of strength in the corporate sector, but an unexpected fall in household spending may raise some concerns about activity.
On the whole, the data on Friday signalled steady economic growth, but it may take more time to achieve sustained rises in prices even as the government’s expansionary policies are making some progress towards ending 15 years of deflation.
“The results are mostly due to energy prices. The output gap is shrinking, but the core-core CPI shows that final demand is still weak,” said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting.
“It’s possible for the BOJ to ease (policy) again later this year, when it becomes clear that there’s not enough progress in reaching its price target.”
Core consumer prices, which exclude fresh food but include energy, were unchanged in May from a year earlier, matching the median estimate from a Reuters poll.
It was the first time in seven months that prices did not fall. Prices fell an annual 0.4 percent in April.
Japan’s core-core CPI, which excludes both food and energy, fell 0.4 percent in the year to May, following a 0.6 percent annual decline in April, the government data showed.
The BOJ unleashed the world’s most intense burst of stimulus on April 4, promising to inject $1.4 trillion into the economy by buying government debt and riskier assets to meet its pledge of achieving 2 percent inflation in roughly two years.
Many private sector economists say the two-year target is overly ambitious. Even one member of BOJ’s policy board has publicly called on the bank to loosen this time frame.
A Reuters poll of 24 economists showed last week that core consumer prices are expected to rise 0.3 percent in the current fiscal year to next March.
They saw consumer inflation picking up only to 0.8 percent in the following year to March 2015, stripping out impacts from a planned sales tax hike next year.
By contrast, the BOJ projects a 0.7 percent rise for this fiscal year and 1.4 percent rise for the next, followed by a 1.9 percent increase in the year to March 2016.
The last time Japan’s core consumer inflation topped 2 percent for the year was in the early 1990s when its asset-inflated bubble economy collapsed. Later in that decade deflation set in the Japanese economy.
Finance Minister Taro Aso played down the significance of the fact consumer prices stopped falling, saying that it wasn’t a sign of an immediate end to deflation.
“It’s true that the pace of decline in prices is slowing, but it’s not that easy (to end deflation),” Aso told reporters.
Separate data on the labour market showed the jobs-to-applicants ratio rose to 0.90 in May from 0.89 in April, meaning jobs were available for 9 out of 10 job seekers. This marks the strongest demand for workers in five years.
The unemployment rate was unchanged at 4.1 percent.
Wage earners’ household spending fell 1.6 percent in May from a year earlier, sharply below the median estimate for a 1.4 percent increase.
Consumer spending is likely to expand as some shoppers buy more luxury goods and next year’s sales tax hike prompts a last-minute buying spree, but some economists warn that spending will eventually slow as wages have not increased.
Industrial output rose by a better-than-expected 2.0 percent in May from April and the outlook is for slight net growth in coming months, data from the Ministry of Economy, Trade and Industry showed.
Manufacturers expect their output will fall 2.4 percent in June before increasing 3.3 percent in July, partly due to improving demand for cars from the United States.
In another bright sign, the Markit/JMMA Japan Manufacturing Purchasing Managers Index showed manufacturing activity expanded in June at the fastest pace in more than two years.
Japan’s economy grew at an annualised rate of 4.1 percent in January-March, as private consumption and a rebound in exports led a recovery from a slump last year.
Additional reporting by Stanley White and Leika Kihara; Editing by John Mair & Kim Coghill