TOKYO, Sept 27: Japanese inflation hit a five-year high last month, although Friday’s data showed the rise was driven by soaring energy costs, indicating the government’s plan to boost consumer demand was still to gain traction.

The consumer price index, which measures a basket of everyday goods but excludes the volatile cost of fresh food, was up 0.8 per cent from a year earlier, according to the internal affairs ministry.That was the biggest monthly rise since November 2008, when it logged a 1.0pc increase, and the third consecutive monthly jump.

The new figures are likely to be embraced by Abe’s government. The conservative leader has pledged to drag Japan out of its 15-year deflationary funk with a policy blitz dubbed “Abenomics”, lifting prices and wages to get the economy moving again.However, the upbeat headline for Friday’s data was tempered by the fact that prices were being driven up by higher fuel bills, not surging demand for everyday goods like vacuum cleaners and clothes which power the economy as a whole.

Energy imports soared in the wake of the Fukushima atomic disaster in 2011, forcing the shutdown of Japan’s nuclear reactors.

Some firms are raising prices -- including drinks maker Yakult, which is ushering in its first hikes in over 20 years -- but that is largely due to a weak yen driving up material costs.

“If gains in prices were driven by increased domestic demand, someone paying higher prices means someone else is earning more locally, creating a virtuous cycle in the economy, but these activities aren’t widely seen,” Tetsuhide Mikamo, director at Marubeni Research Institute, told Dow Jones Newswires. “Abenomics is only half done.”

Falling prices may sound like a good thing for shoppers, but they can be bad for growth because they encourage consumers to put off spending, knowing they will pay less for a product if they wait.

That makes it difficult for companies to invest and discourages them from giving wage rises, which, in turn, reduces consumer spending further.

Broad-based inflation is key to Tokyo’s bid to reflate Japan’s deflation-plagued economy, a mix of government spending and reforms meshed with monetary easing from the Bank of Japan, which has sharply weakened the yen.

The cheaper yen helps fatten profits at leading exporters, powering a 42pc rally in the Nikkei 225 stock index since the start of the year, although it also jacks up resource-poor Japan’s energy import bills.

Benefits of Abenomics not ‘felt evenly’

Early signs suggest Abe’s growth blueprint is having a positive effect, with the world’s third-largest economy expanding again in the June quarter as cautious firms hiked their capital spending.

Still, it has yet to translate into widespread wage rises, which are essential for convincing people to start spending more.

“Abenomics is widely heralded as a boon to Japanese society, but the benefits are not being felt evenly,” said London-based Capital Economics.

“The sluggishness of wages combined with rising inflation has diminished households’ purchasing power.”

The inflation figures come ahead of the release of other key figures next week, including factory output and household spending data, while the Bank of Japan is set to release its closely watched Tankan business confidence survey.

The central bank, which earlier this month upgraded its assessment of the nation’s economy, is also set to hold a two-day policy meeting next week.

The BoJ unveiled a massive monetary easing drive in April, which formed a key part of Tokyo’s bid to reflate Japan’s sagging economic fortunes.

It also set a target of reaching 2pc inflation by 2015, an ambitious goal to reverse falling prices.

Observers say Japan’s premier must do more -- including overhauling a rigid labour sector, bringing more women into the workforce and shaking up protected industries such as farming -- if he wants to make good on his pledge to revive the economy.

Some fear that a planned sales tax rise, aimed at chopping Japan’s massive national debt, will cut short its fledgling recovery.

Abe is expected to confirm the tax rise next week as he unveils a sweeping new economic plan that is likely to include more stimulus measures and a possible corporate tax rate cut.—AFP