Japan's Long-Awaited Inflation Saps Spending, Growth (Update2)
By Mayumi Otsuma
Jan. 29 (Bloomberg) -- Japan's decade-long fight against deflation may be over, only to be replaced by inflation that is sapping economic growth.
Central bank Governor Toshihiko Fukui has been predicting the economy's longest expansion in more than 60 years will spur profits and feed into wages and consumer spending, leading to steady price gains. Instead, prices are being driven by increasing oil and raw-materials costs, which is hurting profits and wages and eroding household spending power.
``After waiting so long, the Bank of Japan may well end up with the wrong sort of inflation,'' said Ben Eldred, a senior economist at Daiwa Securities SMBC Co. in London, a unit of Daiwa Securities Group Inc., Japan's second-biggest brokerage.
``Rising energy and food prices are bad news for firms and consumers and will provide a further headwind at a time when Japan already has to contend with a sharp slowdown in the U.S.,'' he said.
Consumer prices, excluding fresh food, rose 0.8 percent in December, the fastest pace in more than nine years and double November's 0.4 percent, the government said last week. Prices had been falling as recently as September.
Cost-driven inflation coupled with slower economic growth may make it more difficult for the central bank to implement its policy of gradually raising interest rates. Fukui said on Jan. 11 that higher oil and commodity costs, while putting pressure on consumer prices, are squeezing profits and weighing on growth.
Bursting Bubbles
Since July 2006, when he ended a policy of keeping borrowing costs near zero, Fukui has argued that rates need to rise to reflect an economy that recovered from three recessions following the bursting of the stock- and property-market bubbles in the early 1990s. The bank last increased its benchmark overnight lending rate, to 0.5 percent, in February 2007; that's still the lowest among major economies.
Investors predict the bank's next move may be a rate cut. According to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps, there's a 52 percent chance it will reduce the key rate by July. Fukui's term ends in March.
``A cut would become a realistic option if the jobless rate starts rising and wages keep falling,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. ``Policy makers would have to be more worried about the economy rather than inflation.''
Fewer Jobs Available
Japan's unemployment rate stayed at 3.8 percent in December, the government statistics bureau said today. The ratio of jobs available to each applicant fell to a two-year low of 0.98. Retail sales slid 0.1 percent in 2007, the first decline in five years, the Trade Ministry said.
Surging wheat and barley prices are making it costlier for Nisshin Foods Inc. to produce pasta and Kirin Holdings Co. to brew beer for consumers. Meanwhile, workers' pay is falling as Japan's export-led economy loses steam. Average wages slid in nine of the first 11 months of 2007 and have slumped 11 percent, or 500,000 yen ($4,700), since 1997.
Rising prices of necessities such as food and transportation may trim growth by as much as 0.3 percentage point, Dai-Ichi Life Research Institute predicted in a report last week. The government has forecast gross domestic product will expand 1.3 percent in the year ending March 31.
With consumer confidence at a four-year low, companies are finding it hard to pass on higher costs.
Taxi Fares
After Tokyo taxis raised fares last month for the first time in a decade, average daily sales fell 2.8 percent, the Tokyo Taxi Association said. Q.P. Corp., which lifted mayonnaise prices in June for the first time in 17 years, found that revenue remained flat because the quantity sold slid 2 percent.
``There isn't a single bit of good news about the consumer environment,'' Junji Ueda, president of FamilyMart Co., Japan's third-largest convenience-store operator, said in an interview today. ``High fuel prices, increases in product costs, low wages, pension and social security issues, and the state of Japan's politics are all raising concerns among consumers.''
Some businesses are trying to bear cost increases themselves instead of jeopardizing their market share. Aeon Co. and Seven & I Holdings Co., Japan's two biggest retailers, announced price reductions on some products last year. Earlier this month, Izumiya Co., an Osaka-based supermarket chain, cut prices on 100 items ranging from cheese to detergent.
``Consumers are hopping around stores to find bargains,'' said Katsutoshi Shimokawa, an Izumiya spokesman. ``Foisting higher costs onto them would only discourage consumption because wages haven't risen.''
Falling Profit
Rising costs are taking a toll on corporate profit, which fell for the first time in five years in the third quarter of 2007, according to a Ministry of Finance report last month.
Bankruptcies rose to a four-year high in 2007 as 14,091 businesses closed their doors. Cheese Cake Factory garnered headlines this month after the Tokyo-based restaurant chain shuttered 30 outlets, partly because of soaring dairy prices. The company has no connection to the Calabasas Hills, California-based Cheesecake Factory Inc.
Some 86 percent of consumers expect prices to rise this year, a Bank of Japan survey showed Jan. 16. That's the highest proportion since the bank began asking the question a decade ago. Most respondents said they plan to spend less.
``Living on my husband's pension, higher prices are a big concern,'' said Yuriko Takenaka, a 72-year-old housewife in Wakayama, western Japan, who has managed the household budget every day since their marriage in 1961. ``I make it a strict rule to only buy necessities and avoid any lavish spending.''
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