The Bank of Japan (BoJ) has been on a costly crusade to reach a two percent inflation target after years of slumping prices. However, Japanese consumers are telling the BoJ that the current move in consumer prices are not helping as they keep their wallets closed.
Household spending in February fell 2.5 percent year-over-year, falling below economist expectations of a .1 percent increase. Retail sales were also sluggish as consumer prices have increased the most in 16 years. There was an expectation of consumer spending to dampen a bit after the three percent sales tax hike in April, but analysts believed it would spur spending prior to the hike. Inflationary pressures are hitting consumers, and a three percent tax increase will not help.
Prime Minister Shinzo Abe will use 40 percent of outlays for the next fiscal year in the second quarter and promised to spend even more in stimulus. According to Naoki Iizuka, an economist at Citigroup, “we can’t be optimistic about the resilience of the economy after the sales-tax hike.” Iizuka expects the BoJ to implement more easing in June or July, while some see more asset purchases in May.
The effects of Abeconomics are beginning to sputter, but the remedy looks to be more stimulus.