JAPAN INFLATION RISES

Consumer price inflation in Japan rose to an annual rate of 0.7 per cent in July, its highest level in almost five years, as the effects of a weaker yen pushed up the cost of fuel and electricity.

The headline figure is likely to viewed with some satisfaction by policy makers trying to overturn more than a decade of deflation in Japan, which they claim has sapped companies’ willingness to invest while weighing on household consumption.

The Bank of Japan, under the firm direction of Shinzo Abe, prime minister, is aiming to keep monetary policy loose enough to achieve a 2 per cent rate of inflation by March 2015. Mr Abe, for his part, has adopted a more flexible approach to fiscal spending while pushing for various structural reforms to boost Japan’s attractiveness as an investment destination.

However, the figures showed that while resource-poor Japan is paying more for mineral fuels, a broader, demand-driven recovery is yet to take hold. Excluding fresh food, the all-items index rose by 0.7 per cent from a year earlier, and by 0.1 per cent from June.

But excluding the cost of energy from the calculation brings the yearly CPI to minus 0.1 per cent. The prices of items such as housing, furniture, medical care and culture and recreation all fell from a year earlier, while charges for fuel, light and water rose by 6.4 per cent.

“We are now in an early stage of an inflationary condition, so it can’t be helped that cost-pressure is leading the overall trend of the CPI numbers”, said Junko Nishioka, chief economist at Royal Bank of Scotland in Tokyo.

Given that Japan’s output gap is narrowing – closing to minus 1.9 per cent in the second quarter, from minus 2.1 per cent a year earlier, on government estimates – the “positive trend is likely to continue”, she said.

CPI in Tokyo in July, considered a leading indicator for the rest of the country, rose to 0.5 per cent from 0.4 per cent in June, she noted.

Other data released on Friday morning were positive. The jobless rate dropped to 3.8 per cent, from 3.9 per cent in June, while industrial production rose by 1.6 per cent on a yearly basis and 3.2 per cent on a monthly basis.

Household spending edged up 0.1 per cent from a year earlier, from a 0.4 per cent fall in June.

The headline CPI rate for July was the highest since a 1.0 per cent reading in November 2008.