Japan’s CPI figures to move into the negative territory by mid-2015

And stay flat in the next several months.

Softer-than-expected CPI numbers dominated news headlines in the last few days.

According to a report by DBS, industrial production dropped -3.4% (MoM sa) in Feb, a significant pullback from the 3.7% rise in Jan. Retail sales and household spending continued to contract in Feb, measured in the year-on-year terms.

Excluding the sales tax, headline inflation has fallen to 0.2% (YoY) in Feb and core inflation has dropped to 0%. It now looks that CPI figures will stay flat at 0-0.2% in the next several months and move into the negative territory by the middle of this year.

DBS says that still, this doesn’t mean the Bank of Japan will respond with additional monetary easing. The BOJ has hinted at the latest policy meeting that it will tolerate lower-than-expected CPI numbers. The current phenomenon of “deflation” is mainly caused by energy price declines. This should be seen as positive for the Japanese economy as it helps to restore consumers’ purchasing power and provide support to domestic demand. Policymakers will likely pay more attention to the demand-side developments and the medium-term prices trend. The wage data (Feb) and Tankan business survey (1Q) will be keenly watched this week.