Japan inflation seen weak despite export boom as COVID-19 hits consumption

TOKYO: Japan's export boom extended into in July but consumer prices likely fell, a Reuters poll showed, highlighting the divergence between manufacturers benefiting from robust global demand and retailers suffering from a resurgence in COVID-19 infections.

The mixed batch of data will likely highlight the challenge policymakers face in combating a spike in Delta variant cases, without choking off a fragile economic recovery.

Exports likely surged 39 per cent in July from a year earlier after a 48.6 per cent spike in the previous month, according to analysts polled by Reuters, though the figures are inflated by the base effect of last year's pandemic-induced slump.

"Exports will remain strong with capital and IT-related goods serving as main drivers thanks to robust global demand for capital expenditure," said Kenta Maruyama, an economist at Mitsubishi UFJ Research and Consulting.

Imports likely rose 35.1 per cent in July from a year earlier partly due to rising raw material costs, the poll showed.

In a sign of weak domestic demand, Japan's core consumer prices likely fell 0.4 per cent in July from a year earlier, according to the poll.

The drop is partly due to a change in the base year for the consumer price index (CPI) that gives a heavier weighting to cellphone charge fees, which have fallen sharply recently.

Analysts expect the base-year change to shave about 0.7 percentage point off core CPI. Under the new base year, core consumer prices fell 0.5 per cent in June, according to the government, compared with a 0.2 per cent gain under the old base year.

"Japan won't see inflation accelerate as much as in the United States and Europe with service-sector firms under strain from the pandemic," said Takeshi Minami, chief economist at Norinchukin Research Institute.

Core machinery orders, meanwhile, likely shrank 2.8per cent in June, falling for the first time in four months in a worrying sign for capital expenditure, the poll showed.

The government will release the trade and machinery orders data at 8.50am local time on Aug 18. The consumer price data is due out 8.30am on Aug 20.