Japanese prices extended their run of gains to eight months, rising the most in more than two years.

While that’s progress, it still leaves inflation at less than half the central bank’s target, despite the tightest labor market in decades.

Key Takeaways

Heading into next month’s election, the government can point to an economy that’s doing well after almost five years of Abenomics. The number of people working is increasing, the size of the economy has expanded more than 10 percent and is on track to grow for a seventh quarter in a row. However, that good news is partly the result of massive fiscal and monetary stimulus, which has pushed up debt and swelled the central bank’s balance sheet. And like in many other nations, inflation is weak and wages haven’t kept pace with rising gross domestic product.

Economist Views

• "Core CPI is rising as we’d forecast, and we believe it’s on its way toward a little under 1 percent by the end of the year," said Masaki Kuwahara, senior economist at Nomura Securities Co.
• "Of late energy prices and the dollar-yen rate have been the main drivers of consumer price moves, and much depends on how they’re moving," Kuwahara said. "There’s the view that the tight labor market should theoretically have more of an effect on the core CPI, but in our view the state of the labor market at the moment doesn’t have the power to drive up prices quite yet."
• "Production is getting stronger on the back of good exports while consumption is a bit weak," said Takeshi Minami, chief economist at Norinchukin Research Institute. "The overall picture remains that the economy is recovering gradually."
• "Real wages haven’t really increased, so it’s not a surprise that consumption isn’t going up," said Hiroaki Muto, chief economist at Tokai Tokyo Research Center. "I think consumption has really hit the brakes during the third quarter."

Bloomberg Intelligence

A pickup in Japan’s inflation, rebound in household spending and continued tightness in the labor market in August point to steady improvement in the economy, Bloomberg Intelligence economist Yuki Masujima wrote. Inflation is on track to approach 1 percent by October, but it "will be challenging" for it to go higher than that, let alone reach 2 percent, according to Masujima. If Prime Minister Shinzo Abe wins the election, his plan to channel more public resources into education and child care would be positive for consumption, he said.

Other Details

• Overall, nationwide prices rose 0.7 percent in August (estimate +0.6 percent).
• Excluding fresh food and energy, prices rose 0.2 percent (estimate +0.2 percent).
• The job-to-applicant ratio remained at 1.52 (estimate 1.53), the highest since the mid-1970s.
• Year-on-year industrial production climbed 5.4 percent (forecast +5.2%).
• Industrial production is forecast to fall 1.9 percent this month and to rise 3.5 percent in October. 
• Retail sales measured month-on-month fell 1.7 percent (forecast -0.5 percent). 
• Versus a year ago sales rose 1.7 percent (forecast +2.5 percent).