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Japan's inflation remains well below target

June 2017

Although Japan’s economy continues to improve slowly, the country’s rate of core consumer price inflation remains subdued. This is creating a headache for Japan’s officials who are trying to balance a tight labour market with lacklustre growth and inflation.

  • Economic growth in Australia lost momentum during Q1
  • Australia’s key interest rate has remained at 1.5% since August 2016
  • Officials in South Korea remain preoccupied by the prospect of further monetary tightening in the US

Japan’s economy expanded more slowly than expected over the first three months of 2017: the country’s economy posted annualised growth of only 1%. Bank of Japan (BoJ) policymakers maintained their monetary policy during June. Despite signs that the country’s economy is continuing to improve – albeit at a moderate pace – underpinned by a strengthening labour market, core inflation remains subdued at 0.4% year on year, although it is expected to continue to rise slowly towards its 2% target.

“Japan’s tight labour market remains a conundrum for policymakers”

The ratio of active job openings to applicants continued to rise in Japan during May. Japan’s tight labour market remains a conundrum for policymakers, who are trying to balance the labour shortage with subdued economic growth and inflation.

The Nikkei 225 Index rose by 1.9% during June while the broader-based Topix Index climbed by 2.8% and the TSE Second Section Index rose by 3%. Beleaguered electronics company Toshiba was relegated from the Topix Index to the TSE Second Section Index during the month. The company revealed that its full-year losses for 2016 could be as high as 995 billion yen, and once again delayed the publication of its annual earnings.

Australia’s economic growth lost momentum during the first three months of 2017: the country’s economy grew at an annualised rate of 1.7% over the period, compared with growth of 2.4% during the final quarter of 2016. The slowdown was attributed to decelerating growth in the agriculture, forestry & fishing and manufacturing sectors and by a decline in export activity. Looking ahead, the Reserve Bank of Australia (RBA) expects economic growth to increase “gradually over the next couple of years to a little above 3%”.

Although the slowdown had been widely expected, it still triggered some debate over the outlook for interest rates. The RBA’s key interest rate has remained at 1.5% since August 2016 and, even if a rate cut is not on the cards, the news on the economy is likely to dampen speculation over the possibility of monetary tightening. The ASX All Ordinaries Index remained largely unchanged over June as a whole.

Policymakers at South Korea’s central bank maintained the key interest rate at 1.25 at their May meeting , but expressed concerns about the uncertain domestic and international backdrop. In particular, they highlighted the likelihood of further tightening of US monetary policy. The Kospi Index rose by 1.9% during June.


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