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Japan inflation stagnant at 0.2%

Japan’s labour market reached its tightest in 26 years but weakness in wages and consumer spending led to stagnant prices, according to a deluge of economic data for March.

The ratio of open jobs to applicants rose 0.02 points to 1.45 times, the highest since November 1990 and within a fraction of the peak hit during Japan’s bubble economy of the 1980s.

Yet core consumer prices, excluding fresh food, were up only 0.2 per cent on a year ago, similar to the previous month, as worsening labour shortages prove slow to turn into higher pay and greater spending at the shops.

The figures suggest Japan remains locked in a holding pattern, with the economy growing faster than its long-run potential, but still not reaching the point of a self-sustaining rise in consumption.

“The Bank of Japan’s 2 per cent [inflation] target remains far distant, reflecting the continued oversupply of consumer markets, recent oil price and currency movements, and this year’s wage settlements,” said Yasunari Ueno, chief market economist at Mizuho Securities in Tokyo.

The BoJ kept monetary policy on hold this week, signalling it was too early to consider any move away from the massive monetary stimulus under which it is buying ¥80tn ($720bn) a year of government bonds.

Rising employment confirmed the strength of the labour market, with the unemployment rate holding steady at 2.8 per cent, compared with analyst expectations for 2.9 per cent. Unemployment is at its lowest since the early 1990s.

Despite weakness in the yen, however, there was little sign of an acceleration in prices towards the BoJ’s goal. The central bank’s preferred definition of inflation, excluding fresh food and energy, fell by 0.1 per cent compared with a year ago.

“As a whole, there were no signs of aggressive price hiking at the retail level,” said Barclays analysts Yuichiro Nagai and Yukito Funakubo. “However, there were also no signs of a retreat into deflation.”

“We retain our outlook for year-on-year nationwide core CPI inflation to strengthen gradually with an increasing contribution from energy components.”

Industrial production fell 2.1 per cent compared with a month ago on a seasonally adjusted basis. But manufacturers radiated confidence in the outlook, forecasting an 8.9 per cent increase in output during April, reflecting the weaker yen and a stronger global economy.

Consumption expenditures, adjusted for prices, were down by 1.3 per cent compared with a year ago. That was similar to a 1.4 per cent fall in real incomes, showing how the failure of a tight labour market to turn into wage rises is holding back spending in the economy.