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Japan reports inflation, household spending soften in July; incomes rise on bonus payments

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TOKYO — Japan's inflation rate dropped to its lowest level in more than two years in July and household spending also slowed, data that likely will raise pressure on the central bank to up its barrage of monetary stimulus.

The economy, the world's third largest, contracted 1.6 percent in April-June. Many economists are forecasting a renewed expansion in the current quarter, though weakening demand for exports to China and other emerging markets could foil those hopes.

Despite the recent bout of turmoil in world markets the central bank governor, Haruhiko Kuroda, has stuck to his insistence that the economy is in the midst of a moderate recovery.

"There has been some concern over the weakness in exports and production in recent months, but we see this as temporary," Kuroda said in a speech this week to the Japan Society.

The figures released Friday showed the inflation rate in July was 0.2 percent, compared with 0.4 percent in June. That was its lowest level since June 2013. Core inflation, excluding volatile food prices, was flat.

Price increases have moderated with the fall in oil prices, but that effect is thought to have peaked this summer.

The inflation rate remains far from the official target of 2 percent set by the central bank and government and

The Bank of Japan is spending trillions of yen (billions of dollars) a month on asset purchases intended to push inflation higher and end years of deflation, or chronic price decreases.

The idea is to get consumers and businesses to spend more money and spur growth, but so far the spending that accounts for most of Japan's economic activity has failed to pick up despite modest increases in some workers' wages.

Japan's unemployment rate was 3.3 percent in July, down from 3.4 percent in June, raising the likelihood that businesses that are short-handed may boost pay as they compete for workers.

Household spending fell 0.2 percent in real terms on an annual basis in July, though incomes rose 5.4 percent in real terms, likely thanks to semi-annual bonus payments.

"July employment and household finance indicators look consistent with the Bank of Japan's assessment of a Japanese economy that is 'recovering moderately,'" Bill Adams of PNC Financial Services Group, said in a research note.

He noted that some of the decline in household spending may be due to belt-tightening by the growing numbers of Japanese retirees living on fixed incomes.

It is unclear if the recent gyrations in share prices will have a spillover effect on spending.

The main Nikkei 225 stock index rose 2.3 percent on Friday, tracking rallies in other major markets, but remains down 6.6 percent for the month. The Japanese yen was trading near 121 yen to the dollar after a mid-week surge that took it to the 118 yen level.

A weaker yen tends to help push share prices higher, since it can improve profits of major manufacturers that earn much of their revenue overseas. But it can have a mixed impact on smaller businesses that rely on imported components and energy. It also undermines consumers' purchasing power.

PHOTO: In this June 26, 2015 photo, a man shops at a supermarket in Tokyo. Japan's inflation rate and household spending slowed in July, according to data released Friday, Aug. 28, 2015 that will likely raise pressure on the central bank to up its barrage of monetary stimulus. (AP Photo/Koji Sasahara)
In this June 26, 2015 photo, a man shops at a supermarket in Tokyo. Japan's inflation rate and household spending slowed in July, according to data released Friday, Aug. 28, 2015 that will likely raise pressure on the central bank to up its barrage of monetary stimulus. (AP Photo/Koji Sasahara)

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