UPDATE 2-Japan CPI falls as expected, no phone-fee surprise

(For economists' initial views on Friday's economic indicators, click on [ID:nT110131]) (Adds minister's comment, details)

By Yuzo Saeki

TOKYO, Oct 26 (Reuters) - Japanese core consumer prices fell in September from a year earlier, marking the eighth straight month of decline and doing little to change expectations that the Bank of Japan's monetary policy will remain on hold.

But government data also showed Tokyo area prices were flat in October, which economists said suggested that the nationwide index too is likely to have stopped falling in October and to rise in the following months.

"Overall this means things are moving in line with the Bank of Japan's scenario as they have been saying that CPI would turn positive soon," said Mamoru Yamazaki, chief economist at RBS Securities.

Japan's industrial production declined in September from a month earlier as expected, separate government data showed on Friday, following a jump in the previous month.

After the latest CPI and output data, swap contracts on the overnight call rate JPONIBOJ=TRDT are pricing in less than a 20 percent chance of a BOJ rate rise by the end of this year, little changed from the level before the data.

Japanese core consumer prices, which exclude volatile fresh food prices, fell 0.1 percent in September from a year earlier as expected. In the Tokyo area, the core CPI was flat in October compared with a year earlier, also matching expectations. [ID:nT121019] Finance Minister Fukushiro Nukaga told a news conference on Friday that stable prices are good for the economy.

"(Core consumer) prices are moving near zero, basically, but it is desirable for prices to stabilise in order (for people) to feel the economy's recovery," Nukaga said.

Consumer prices have been falling slightly from a year ago since February as constant price falls in high-tech products such as flat-screen TVs and computers have outweighed higher food prices.

But economists have said core CPI is likely to start rising as early as October, bolstered by oil prices. U.S. crude futures CLc1 hit a fresh record high of $91.10 per barrel earlier on Friday.

The government said on Friday the CPI would not include cheaper mobile phone price plans that Japanese operators will introduce next month. The cuts that could have trimmed 0.3 percentage point or more from core CPI [ID:nTKV002865].

An official at the Internal Affairs Ministry, which compiles the CPI data, said it might include the new fees in future if the new billing system became popular among subscribers. "The decision is that the new cellphone fees won't be included, so that will have a neutral impact and the Bank of Japan is probably breathing a sigh of relief," Yamazaki said.

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But that alone will not be sufficient for the BOJ to raise interest rates, given lingering fears about the impact of the recent global market turbulence on the real economy.

BOJ Governor Toshihiko Fukui said last week he has grown more certain that Japan's economy remains on a sustained growth path, but he also stressed that uncertainty remains over the outlook in light of global market turmoil.

Masamichi Adachi, a senior economist at JPMorgan Securities, said: "We expect the next rate rise in January-March, but that would depend on the global economy and a rise in Japanese workers' wages."

Market participants are now focused on the BOJ's twice-yearly outlook report on the economy and prices due on Oct 31.

Japan's industrial production fell 1.4 percent in September from a month earlier, almost in line with the median market forecast for a 1.3 percent fall. [ID:nT269276].

That meant production grew a stellar 2.2 percent in July-September, after doldrums stemming from inventory adjustments in Japan's high-tech sector in the first half of the year.

"That should keep the BOJ's view on the corporate sector unchanged," said Tatsuo Ichikawa, a strategist at ABN AMRO Securities. "The data should not change the market's expectations for a BOJ monetary tightening."

Manufacturers' output, the core component of production, is expected to rise 3.8 percent in October and drop 0.7 percent in November, the data also showed.

"We need to be cautious whether production, especially that of automobiles for the U.S. market, will continue rising," said Yoshimasa Maruyama, economist at BNP Paribas.

Data earlier this week showed U.S.-bound exports dropped in September.

"If that continues in October, it's inevitable that production will fall," Maruyama said. (Additional reporting by Hideyuki Sano, Leika Kihara and Tetsushi Kajimoto)