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Will Japan escape from deflation?

Genzo Kimura, Economist, SuMi TRUST, looks at whether Japan can finally move out of deflation…

Much scepticism remains among foreign investors as to whether Japan will ever be able to move out of deflation. However, recent GDP statistics released by the Cabinet Office show that the key deflation indicators, deflators, are now at the point of no decline at 0.01% when compared to the same period last year. This is a small but highly significant move.

GDP deflators can be divided into two groups; the domestic deflators and trade deflators. The domestic deflators have already reached 0.7% over 2013 which reflects the momentum of the core consumer price index, excluding food and energy. The big drivers of the core consumer price index being personal computers, up 21.6% when compared to last year, handbags up 21.9%, mobile phones up 7.4% and auto insurance up 13.6%.

This is almost the first time since 1997, when the financial crisis first hit Japan, that the core consumer price index in Japan has broken the zero per cent ceiling and turned positive.

We believe the core index will remain in positive territory as we move forward into the second half of the year. In April this year regular monthly wages were raised by an average of two per cent and historically this has been a substantial driver for inflation.

The core index movement indicates that Japan is about to escape from deflation without having to rely on an increase in food or energy prices.  Nevertheless, there are risks facing the overall GDP deflator which could reverse it back into negative territory. The largest of these being that the trade deflator will not decline if Japan cannot re-start and re-operate its nuclear power plants. Currently, a nuclear power plant in Kagoshima, the southern part of Japan, is scheduled to re-open from September 2014. If successful, this could see more power plants open in Japan which would help to reduce Japan’s energy costs.”

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