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March consumer price index up 1.2% - is a pull out of deflation coming at the wrong time for the wrong reasons?

On Friday, the Statistics Bureau announced that Japan’s core consumer prices had risen 1.2% in March compared to a year earlier. This follows a1.0% rise in February and successive 0.8% rises in December and January. March was sixth consecutive month that core consumer prices showed an increase, and the 1.2% increase was the largest seen since a 1.8% jump back in March 1998.

What was different about March figures, however, was that when fresh food and energy costs were stripped from the index, consumer prices saw a rise of 0.1% - the first rise in this figure seen since 1998. Before we go any further, let’s take a look at all four consumer price measurement yardsticks and how they each fared in March:

• March general nationwide consumer price index: +1.2%
• March general nationwide consumer price index (excluding rent): +1.3%
• March January nationwide core CPI (excluding fresh food): +1.2%
• March January nationwide consumer price index (excluding fresh food and energy): +0.1%

Immediately after the numbers were released, Economic and Fiscal Policy Minister Hiroko Ota told reporters:

The current rise is of an undesirable nature. It is not being caused by stronger consumption demand but by higher costs. Consumption demand is likely to remain weak because workers’ wages are not picking up.

Over the past year, Ota has been very vocal in her assertions that Japan has not yet pulled out of deflation. At this time, her position on deflation is becoming even more interesting to look at. Data released by the Ministry of Economy, Trade and Industry showed that retail sales rose 1.1% in March - led by a 4% increase in fuel sales. Food and drink sales also seem to be benefiting from increased prices, as they rose 0.6%, as supermarket sales were up 1.4% in March. At the same time, however, clothing sales fell 0.3% while department store sales fell 1.2% in March after having risen 0.9% in February.

Although consumer confidence levels picked up slightly in March, they are still near five-year lows. As Minister Ota hinted at, the “Income Growth” portion of the consumer confidence survey continued to worsen in March, which is a key figure as many wage hikes are anticipated to kick in from April.

Over at Japan Economy Watch, Edward Hugh remains skeptical that Japan is pulling out of deflation:

I would find the argument a lot more plausible if we were now near the start of an expansionary cycle, rather than watching the sunset of one of the longest economic expansions cycles in recent Japanese history. As I indicated in my recent post, Japanese export growth weakened in March, the IMF and World Bank are predicting a slowdown in the rate of expansion of global trade, and we really need to get some measure of how the Japanese economy is going to weather this particular storm before we jump to any “over hasty” conclusions.

Not to mention, a recent Nikkei survey indicated that some 90% of consumers are thinking about saving money when they shop these days. Apparently, more folks intend to cut back on dining out than any other category.

We’ve gotten a bit off of the consumer prices track, so here’s the breakdown of the categories and their price changes in March 2008:

• Fuel, light and water charges +4.2%
• Transportation and communication +3.5%
• Food +1.6%
• Education +0.7%
• Miscellaneous +0.5%
• Clothes and footwear +0.4%
• Housing +0.1%
• Furniture and household utensils -0.6%
• Reading and recreation -0.7%

With household spending data due out Wednesday morning, it will be worth taking a closer look at all this again later in the week.

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