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Economy in Brief

  Japanese Consumer Sentiment Wavers:  Price Expectations Suggest that Concern over Inflation Is Replacing that over Deflation 
by Louise Curley July 11, 2006

Consumer sentiment among Japanese households with two or more persons declined to 47.2 from 49.8 in May according to the Cabinet Office's diffusion index. The decline was greater than expected and resulted in the lowest value of the index so far this year. To illustrate the weakening of consumer confidence, we have plotted the index of consumer confidence and its year over year increase in the first chart. (Since the monthly data are available only from Jan 2004, there are only two and a half years of data.) The year over year percentage change in the diffusion index is an indicator of the trend in the diffusion index. In recent months the year over year percentage change has declined from a peak of almost 6% in March to 1.3% in June. The erosion of consumer confidence contrasts with strengthening of confidence in the business community. (See the commentary by Carol Stone on July 3rd, reporting on the June Tankan Survey.)

In spite of the recent trend, sentiment among Japanese consumers has improved over the period of the survey. The biggest improvement is seen in consumers' attitude toward employment prospects. The index for this component has risen to 51.7 in June, 2000 from 45.6 in June, 2004. The other components--Overall Livelihood and Income Growth have shown more moderate gains but the Willingness to Buy component, while slightly above June 2004, is at 48.8, almost a full point below the 49.7 of June 2005.

Price expectations of consumers in all Households in June show substantial increases in the numbers expecting prices to rise. 23.5% expect prices to rise between 2 and 5% in the next year, almost double the percent that expected such increases in June, 2004. Current price expectations are shown in the following table compared with those for June 2005 and 2004. As an indication of the shift in consumers' concern from one of deflation to one of inflation, we show, in the second chard, the decline in the percent of consumers expecting prices to stay the same or decline by two percent with the rise of those consumers expecting price to rise by less than two percent.

Japan: Consumer Confidence:
  Two Person Households
Jun  06 Jun 05 Jun 04
 Confidence Index  47.2 46.6 44.9
 Overall Livelihood 44.8 45.0 43.6
 Income Growth 43.3 43.2 41.9
 Employment 51.7 48.3 45.6
 Willingness to Buy Durable Goods 48.8 49.7 48.3
 Price Expectations: All Households
 No Change  24.1 40.3 35.7
 Up by Less than 2% 33.5 27.3 27.4
 Up between 2 and 5% 23.7 12.2 17.8
 Down between 2 and 5%  1.0 1.3 1.5
 Down by less than 2%  3.4 6.5 5.7
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