Japan tax hike boosts inflation, hurts spending in May

Update: June, 27/2014 - 10:00

TOKYO — Inflation hit a three-decade high and unemployment dipped further in Japan, data showed on Friday, as the government's bid to jumpstart the economy takes hold, even as analysts warned it was too early for celebrations.

Japanese consumer inflation, stripping out volatile fresh food prices, rose 3.4 per cent year-on-year in May, the fastest pace in 32 years, according to data from the internal affairs ministry.

The rise, which matched market expectations, was largely driven by a consumption tax hike in April that took the rate from 5.0 per cent to 8.0 per cent.

Other data from the ministry showed household spending plunged 8.0 per cent in May on-year after a pre-rise shopping spree.

The tax rise was seen as crucial for shrinking Japan's mammoth national debt, proportionately the worst among wealthy nations. However there have been fears it will derail a budding economic recovery by taking a bite out of consumer spending.

Separate data from the ministry of economy, trade and industry seemed to bear that out, showing retail sales edged down 0.4 per cent in May following a 4.3 per cent fall in April.

But economists say the turndown in consumption in the aftermath of the tax rise was largely a simple displacement.

Consumers had gone on a spending spree ahead of the first sales tax jump in 17 years, snapping up everything from big-ticket items such as cars and refrigerators to everyday goods like toilet rolls and rice.

Takeshi Minami, economist at Norinchukin Research Institute, said that "the belief is that the drop will be temporary and that labour shortages in some sectors will continue."

Jobless rate at 17-year low

Other official data showed Japan's jobless rate edged down to 3.5 per cent in May, the lowest level in nearly 17 years.

The jobs-to-applicants ratio stood at 1.09, the highest in more than two decades, meaning there were 109 job offers to every 100 job seekers.

The improved ratio and unemployment figures will add pressure on firms to raise wages to attract workers, said Junichi Makino, economist at SMBC Nikko Securities.

"That's good for households, and will also help add to inflation," as companies have to raise prices to account for higher wages, he said.

There are about one million workers who can still join the workforce and "companies will only be able to attract those workers with higher wages," he told Dow Jones Newswires.

Minami of Norinchukin said that with the latest data the government and the Bank of Japan can afford to maintain a wait-and-see stance for now.

But he added it was important to watch whether wages will increase to make up for the higher sales tax as the employment situation is tight only in limited sectors such as construction, retail and services.

Prime Minister Shinzo Abe indicated the Japanese economy has coped well with the tax hike but said "it is too early to give such a verdict."

Excluding the effect of the higher tax on prices, Japan's core consumer prices were estimated to have risen 1.4 per cent in May, just below a 1.5-per cent increase for April.

Capital Economics said in a note that it believed "underlying inflationary pressure has eased."

The Bank of Japan is aiming at 2.0 per cent inflation, excluding the tax hike effect.

Abe's government has put conquering deflation and stoking growth in the world's third-largest economy at the top of its agenda with a policy blitz dubbed "Abenomics". — AFP