You are here

Japan's economy slumped in December, escalating pressure on BOJ

The Bank of Japan on Friday adopted a negative interest rate policy to spur lending and help drive inflation towards its two-percent target.

[TOKYO] Japan's economy ended 2015 with a bust, as everything from household spending to industrial production and exports tumbled in December, escalating pressure on the Bank of Japan to add to its stimulus programme as soon as Friday.

Output from the nation's industries slid 1.4 per cent last month from November, worse than any of the forecasts in a Bloomberg survey, a government report showed.

Spending among households, when compared with a year earlier, fell the most in nine months. Exports last month dropped the most since 2012. A core gauge of consumer prices remained far from the BOJ's target.

The weakening came before this month's global financial turmoil and worries about China's slowdown, which threaten to unsettle Japanese businesses' plans for investment and spending.

Both the Bank of Japan and the Abe administration have been pressing companies - flush with record profits from years of enjoying a cheap yen - to deploy their cash and fuel reflation.

"The state of the economy and financial markets warn that no one should be surprised by further BOJ easing today," said Yoshiki Shinke, chief economist at Dai-Ichi Life Research Institute in Tokyo. "The outlook for a pickup in inflation is diminishing and there is little indication that the economy is gaining momentum this quarter."

Consumer prices excluding fresh food rose 0.1 per cent in December from a year earlier, according to a statistics bureau report. That matched the median estimate of economists surveyed by Bloomberg. Household spending slumped 4.4 per cent from a year earlier, while the jobless rate stood at 3.3 per cent, data from the bureau showed.

A further drop in oil prices, a reversal in the yen's declines and turmoil in global financial markets have put pressure on the BOJ to do more to spur price gains and boost economic growth. Some BOJ officials view it a close call as to whether the policy board will add to stimulus at a two-day meeting ending around midday in Tokyo, according to people familiar with discussions at the central bank.


"Given declining oil prices and a reversal of the weak yen, the inflation rate will probably stay near zero and inflation expectations will be unlikely to rise anytime soon," said Hiroaki Muto, chief economist at Tokai Tokyo Research Center. "Sooner or later, the BOJ has no choice but to take on additional easing."

Industrial production fell 1.4 per cent in December from the previous month, according to a report released by the trade ministry on Friday. That compared with forecasts for a drop of 0.3 per cent.

"Japanese manufacturers will probably hold off spending as the global financial markets have been roiled and Japanese stocks slumped," Mr Muto said. "The prospects for exports and production are looking cloudy, meaning the economic momentum will probably weaken in the January-March period."


The yen has strengthened against the dollar in the past month, while most other major currencies have weakened, eroding some of the advantage Japanese exporters had from the foreign exchange market. A stronger yen also pushes down prices.

Six of 42 economists surveyed by Bloomberg expect the central bank to boost stimulus at today's meeting. Twenty-three see a move likely between March and July and 13 say there is no prospect of further easing in the foreseeable future.

At its last meeting in December, the central bank left its main monetary stimulus target unchanged while outlining operational changes for purchases of government bonds, exchange- traded funds and real estate investment trusts. Its policy of expanding the monetary base at an annual pace of 80 trillion yen, mostly through the purchase of government bonds, has been unchanged since October 2014.

While Mr Muto said the BOJ may expand stimulus at this meeting, Junichi Makino, chief economist at SMBC Nikko Securities Inc, said the BOJ may hold off expanding stimulus this time and expand it further as early as the March meeting.