The Impact of Two Price-rising Factors on Japan’s Inflation Assessment

Focus on deterioration of GDP gap after increase in consumption tax


November 06, 2018

  • Satoshi Osanai


◆There is rising concern regarding two factors that could cause an increase in Japan’s consumer price index in the future. These are (1) the planned increase in consumption tax scheduled for October 2019, and (2) the rising price of crude oil since spring this year. In this report, we provide an estimate of the extent to which these factors may impact CPI, while at the same time considering the implications that this could have on Japan’s efforts to overcome deflation and achieve its target for inflation.

◆It is our assumption that the increase in consumption tax and the issue of making preschool education free of charge will not directly impact the overall assessment of CPI, or the government’s efforts to overcome deflation and reach the BOJ inflation target of 2%, other than to act as special, temporary factors. On the other hand, if the GDP gap which the government is especially concerned about falls larger than expected after the planned increase in consumption tax, the goal of overcoming deflation will only grow more distant.

◆Once the approximately 20% rise in the price of crude oil since the spring of 2018 manifests itself more completely, upward pressure (in y/y terms) is expected to be experienced in certain elements of Japan’s core CPI (excluding fresh food), mainly (1) a direct effect via energy expenses pushing CPI up by around +0.29%pt, and (2) an overall effect of around +0.37%pt in consideration of economic structure. In other words, there will be an unambiguous effect of rising oil price on core CPI, and with the time lag that occurs before feeling the entirety of the ripple effects, its impact is expected to continue for some time. However, impact on new core-core CPI (excluding fresh food and energy) is expected to be less than on core CPI. Considering this factor, the comprehensive effect is that at this time, we do not expect the government to reach its goal of overcoming deflation or of reaching the BOJ’s target of 2% inflation.

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