Abenomics is faltering

New economic data coming out of Japan on Friday showed that annual inflation fell back to zero in July in spite of massive amounts of cheap cash that had been pumped into the world's third largest economy by the country's central bank.

Consumer spending also declined, falling 0.2 percent year-on-year and marking the second monthly drop after slumping 2 percent in June.

The disappointing data are the latest indication that the Japanese economy, which contracted 0.4 percent in the second quarter, was likely to continue struggling.

Flash in the pan

The slowdown comes more than two years after Prime Minister Shinzo Abe launched his new economic policy, dubbed Abenomics, to kickstart anemic growth and rein in more than a decade of deflation. The program called for big government spending, massive monetary easing by the Bank of Japan (BOJ) and reforms to free up Japan's highly-regulated economy.

In 2013, the BoJ launched an asset-buying program worth 80 trillion yen ($640 billion, 586 billion euros) annually. Speculation is mounting now that the central bank will expand the purchases to boost the inflation rate to the desired target of 2 percent.

BoJ Governor Haruhiko Kuroda said Friday that if necessary the central bank "will certainly make an adjustment."

Meanwhile, Japan's sovereign debt has soared to $11 trillion, about 245 percent of the country's gross domestic product (GDP), limiting the ability of PM Shinzo Abe to increase spending for growth. In 2014, he was even forced to increase sales taxes to keep the debt burden under control.

China slowdown weighs

In addition to the sales tax hike, analysts have blamed weak economic growth in China for the downturn in Japan. Japanese exports to China represented 18.3 percent of total shipments last year, just behind 18.6 percent to the United States.

Moreover, more than half of all Japanese exports go to the Asia-Pacific region, meaning that Japan's exports to other countries there have also been hit.

"If we consider how intertwined other Asian countries are with China, it is obvious that China's economic performance is even more important to Japan than that of the US, at least as far as trade is concerned," French bank Natixis said in an analysis of Japan's latest data.

However, the prospect of further economic stimulus from the BoJ, likely resulting in a weaker yen which helps exports, boosted Japanese stocks which surged 3 percent on Friday. Good news also came from the labor market where unemployment edged down 0.1 percent to a total of 3.3 percent in July.

uhe/cjc (dpa, Reuters AFP)