Risks to Japan’s low inflation skewed to upside, say economists: Reuters poll

FILE PHOTO: A shopper wearing a protective mask pushes a shopping cart at Japan's supermarket group Aeon's shopping mall as the mall reopens amid the coronavirus disease (COVID-19) outbreak in Chiba
FILE PHOTO: A shopper wearing a protective mask pushes a shopping cart at Japan's supermarket group Aeon's shopping mall as the mall reopens amid the coronavirus disease (COVID-19) outbreak, in Chiba, Japan, May 28, 2020. REUTERS/Kim Kyung-Hoon/File Photo

April 16, 2021

By Kaori Kaneko

TOKYO (Reuters) – Risks to Japan’s weak inflation outlook are skewed more to the upside, according to a majority of economists polled by Reuters, as rising commodity prices, a weak yen and supply shortages brought on by the global pandemic lift input costs.

Some advanced nations have seen inflation tick up on pent-up demand, spurred by the re-opening of economies and a global increase in commodity prices.

But any pick-up in Japan’s inflation will be modest as weak wage growth, a resurgence in COVID-19 infections and slow vaccine rollouts weigh on consumption, economists said.

In an April 6-14 monthly poll, 21 of 35 economists said risks to their Japan inflation outlook were skewed “more to the upside” over the coming year. The rest said risks were to the downside.

For much of the past two decades, Japan has been mired in bouts of disinflation or outright deflation that has confounded central bankers and government policymakers at every turn.

“There’s upside risks to Japan’s inflation because of rising commodity and oil prices, as well as the effect of a slightly weaker-than-expected yen,” said Hiromichi Shirakawa, vice chairman and chief economist for Japan at Credit Suisse. “But any rises in inflation could be temporary and moderate.”

In the near-term, supply constraints, such as a shortage of semiconductors, could also put upward pressure on prices, some economists said.

Core consumer prices, which exclude volatile fresh food costs but including energy prices, will peak at 0.7% later this year, the poll showed, still far from the Bank of Japan’s 2% inflation target.

For the current fiscal year that started in April, core consumer prices will rise 0.4%. That will be followed by a 0.5% increase the following year, the poll showed. Both projections were unchanged from last month.

Japan’s economy contracted an annualised 5.4% in January-March, less than a 6.0% fall projected last month, and was seen rebounding 4.7% this quarter, the poll showed.

Robust exports have underpinned manufacturers’ sentiment, offsetting the hit to growth from state-of-emergency curbs imposed during most of the first quarter, analysts said.

But they warned a global shortage of semiconductors could emerge as a new risk to Japan’s economy.

Over 80% of economists polled said the global chip shortage could push down Japan’s annualised gross domestic product (GDP) by up to 2 percentage points in April-June. A handful of economists said the chip shortage could push down growth by more than 2 points.

The economy was seen expanding 3.9% this fiscal year before slowing to growth of 1.9% next year, according to the poll.

In regards to the BOJ’s monetary policy outlook, a majority of economists polled expected the central bank’s next action would be an unwinding of its ultra-easy monetary policy.

“Unless a large negative shock hits the Japanese economy, the BOJ will continue with its current monetary easing,” said Hiroshi Ugai, chief economist at JPMorgan Securities Japan.

(Reporting by Kaori Kaneko;Polling by Shaloo Shrivastava and Md. Manzer Hussain; Editing by Leika Kihara and Sam Holmes)