(4) INFLATION

Public investment decline to slow because of supplementary budget outlays

Although CPI has remained firm, the rate of increase has slowed recently. The rate of increase in CPI (core CPI, excluding fresh foods as well as the direct impact from the consumption tax hike) stood at +1.3% YoY in Apr-Jun, roughly level with Jan-Mar. This appears to be due to the largely-exhausted upward effect on prices by the weakening JPY. Another factor appears to be slumping private consumption in the wake of the surge of demand brought forward, causing inflation of durable goods price to weaken.

Inflation to remain positive as supply-demand gap tightens

Looking ahead, we think the rate of increase in CPI is likely to keep weakening through year's end as the JPY depreciation effect diminishes. Thereafter, we think inflation will once again start to gradually rise as macro supply-demand conditions continue to tighten as the economy stays on a recovery path (Figure 14). We forecast core CPI (excluding the effect of the consumption tax hike) to stand at +1.1% YoY this fiscal year, then pick up slightly to +1.2% YoY in FY2015.