Japan Slumps further into Deflation Territory

Consumer prices in Japan have reported another slump for the fifth consecutive month in July as it further challenges the Prime Minister Shinzo Abe’s attempts to combat deflation and restore strength to the world’s third largest economy. A 0.5% fall in consumer prices for the month of July was shown by figures released on Friday, much worse than the 0.4% fall seen in the month of June and the biggest annual slump in consumer prices for more than 3 years.

The unwillingness among Japanese consumers and businesses to spend the country out of stagnation will reinforce criticism that Abe’s three-pronged approach to recovery – monetary easing, fiscal stimulus and structural reform – known as Abenomics, has failed to lift the economy’s fortunes, despite a promising start.

Japan’s exports suffered their biggest monthly fall for seven years in July, and data on consumer spending due out next week are expected to add to disquiet over the economy. The data release spans disappointment especially as Japan looks to the Federal Reserve chair, Janet Yellen, to hint at a possible short term rate increase in light of the recent uptick releases coming out of the US economy. Some analysts, however, believe Yellen will strike a more cautious note, saying only that rate hikes are possible.

“The anticipation is a bit too much. She is one of the more pragmatic and balanced speakers,” said Jennifer Vail, head of fixed income research at US Bank Wealth Management in Portland, Oregon. “I think she will leave the door open for a rate hike sometime this year, but I don’t see the Fed actually moving until December.”

The monthly fall in Japanese consumer prices was the largest fall since March 2013, the month preceding the start of the Bank of Japan’s (BoJ) massive monetary easing programme in its effort to achieve Abe’s inflation target which was set at 2%.

The economy is so bad that the Bank of Japan (BOJ) is reportedly considering becoming the first major institution to implement helicopter money, an untested program that calls for making a one-time cash transfer to consumers. In Japan’s scenario, helicopter money would likely also entail monetizing budget deficits and other forms of central bank financing.

According to S&P Global chief economist Paul Sheard, helicopter money in today’s context refers to a “kind of monetary policy and fiscal policy coming together as one thing.”

After years of failed progress, Japan is widely expected to ramp up its stimulus efforts. That Japan would ease more became a foregone conclusion after Abe secured a commanding upper house election victory in July. According to the BOJ Summary of Opinions, the government’s next stimulus package will be “extremely large in scale.”

As the Japanese economy shows signs of falling further into deflation territory, the BoJ is expected to face more pressure to raise its stimulus measures in reaction to Friday’s release after they recently decided to leave its 80 trillion yen ($796 billion) annual bond-buying programme