This is later than predicted by the Bank of Japan (BoJ), who had been suggesting that the target would be reached by next year.
The IMF report, Article IV Consultation on Japan, stated:
“Staff expects that 2% inflation will be achieved by 2017, later than envisaged by the BoJ as we expect a more gradual closure of the output gap and rise in inflation expectations.”
In the consultation, the IMF said that Abenomics – the economic policies advocated by Shinzo Abe – has been successful in planting the seeds for a more dynamic Japan. It also said that the near-term outlook remains favourable and the economy is expected to weather well the consumption tax increase.
However, it warned that over the medium term, transitioning to self-sustaining growth would require greater structural and fiscal reform efforts to avoid slipping back into deflation.
Retail Sales
Data released over the past two days in Japan showed April retail sales dropped 13.7% from the previous month while inflation over the same period rose 3.2% from a year earlier.
For Nathan Gibbs, manager of the Schroders Japanese Equities Fund, the numbers are not surprising and both the retail sales and inflation data are in line with market expectations.
“Following the 1 April consumption tax hike, that saw a 3% increase from 5% to 8%, sluggish April numbers were to be expected – particularly after the March surge that saw retail sales jump at their fastest pace since 1997 as Japanese consumers rushed to beat the deadline.”
Medium term impact
It is quite natural for the Nikkei to take a rest, even to see a more substantial correction, after seeing its best year since 1972 last year, Adrian Lowcock, senior investment manager, said.
“A lot of Japan is about perception the world believes it is in terminal decline. However, it is just an economic cycle, a very long term once in a life time cycle nonetheless. The cycle has been a banking or credit cycle and acts as reminder to the west of how long banking crisis can take to be forgotten. The memory of a banking crisis lasts generations,” he said.
Meanwhile, the balance sheets of corporate Japan are looking as healthy as ever.
“Japanese companies are even leaner, meaner and more ambitious than ever before. Japanese companies are innovative and creative and there is nothing like a bear market to sharpen the reflexes of a business,” Lowcock said.
For Gibbs, the figures in Japan have been encouraging, with machinery orders – a leading indicator of capex – rising at its fastest pace since 1996 in March. And the trend looks set to continue as companies ramp up spending.
"On the whole, the recent corporate earnings season finished ahead of expectations as guidance for the financial year ahead has been mostly positive," he added.
