Japanese prices continue to slide

Tokyo skyline Image copyright AFP

Japan's consumer prices dropped for the fifth consecutive month in July, adding to pressure on the government to expand its already massive stimulus programme.

The data was worse than estimates had suggested and marked the biggest annual drop in more than three years.

The consumer price index, which excludes volatile food prices, fell by 0.5% compared with a year earlier.

Tokyo has been trying to raise inflation for years to stimulate spending and boost the economy.

The disappointing data comes on the heels of weaker-than-expected economic growth released earlier this month and despite an aggressive spending policy by the government.

In July Prime Minister Shinzo Abe announced the latest stimulus effort, a massive new package worth 28 trillion yen ($265bn; £200bn).

Japan has been desperate to boost consumer spending for years which accounts for 60% of the economy.

The government's policy of economic reforms - dubbed Abenomics - consists of a three-pronged fiscal, monetary and structural approach to lifting the economy out of its protracted slump.

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The three arrows: explaining Abenomics

  • The monetary arrow: expansion of the money supply to combat deflation
  • The fiscal arrow: increased government spending to stimulate demand in the economy
  • The structural arrow: structural reforms to make the economy more productive and competitive

Yet despite three years of Abenomics, inflation has remained significantly lower than the central bank's 2% goal.

Persistently weak household spending is to blame combined, more recently, with a strengthening yen which has pushed down import prices.

Analysts expect the rate to remain low or even fall further.

"As such, inflation expectations may weaken further in coming months," Marcel Thieliant, senior economist at Capital Economics said in a note.

"The Bank of Japan has recognised that there are considerable risks to its forecast of hitting its 2% inflation target in the coming fiscal year. We therefore continue to expect more stimulus to be introduced at the Bank's September meeting."

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