Japan consumer prices fall for second month, keep pressure on BOJ

TOKYO (Reuters) - Japan’s core consumer prices fell for the second straight month in April as weak consumption discouraged firms from raising prices, stoking fears of deflation and keeping pressure on the central bank to do more to hit its ambitious inflation target.

A woman holding a shopping basket looks at items inside a discount drug store at Ginza shopping district in Tokyo, Japan, March 28, 2016. REUTERS/Yuya Shino

A separate index calculated by the Bank of Japan also showed consumer inflation slowing to a near one-year low, casting doubt on its argument that underlying price trend is improving steadily thanks to its massive stimulus program.

The data underscores the fragile nature of Japan’s recovery and may give Prime Minister Shinzo Abe justification to delay a scheduled increase in sales tax next year.

A recent Reuters poll added to the gloom, showing a strong majority of Japanese firms surveyed now expect no escape from deflation for the foreseeable future.

“We’re seeing downward pressure on inflation not only from energy but from food prices,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

“Both prices and the economy are weak, so expectations for further BOJ easing will heighten,” he said.

The nationwide core consumer price index (CPI), which includes energy but excludes volatile fresh food costs, fell 0.3 percent in April from a year earlier, matching the drop in March which was the biggest annual decline in three years.

In a sign price falls will persist, core consumer prices in the Tokyo area - a leading indicator of nationwide tendencies - fell 0.5 percent in May, more than a median forecast for a 0.4 percent drop, the government data showed on Friday.

Some analysts warned that Japan may be returning to deflation, despite Abe’s stimulus policies to eradicate such sustained price declines, including three years of aggressive money printing by the BOJ.

“The (CPI data) marks a change in the price trend and is a sign Japan is reverting back to deflation,” said Junichi Makino, chief economist at SMBC Nikko Securities, adding that the BOJ may ease policy at next month’s rate review.

BOJ board member Yutaka Harada on Friday said the bank should not hesitate expanding stimulus if risks, such as a deeper slowdown in emerging economies, derail Japan’s recovery.


The BOJ hopes a moderate economic recovery will keep boosting corporate profits, allowing firms to increase wages and nudge consumers into spending more. Robust consumption will allow companies to raise prices and help accelerate inflation.

Last year, some companies passed on rising import costs from a weak yen on households. That trend has subsided this year due to the yen’s rebound and weak consumer demand, analysts say.

The BOJ’s internal index that strips away energy and fresh food prices but includes processed food costs, showed consumer inflation slowed to 0.9 percent in April from a year earlier versus 1.1 percent in March.

It was the first time since July 2015 that the index had fallen below 1 percent, casting doubt on the BOJ’s view that underlying trend inflation was improving steadily.

The BOJ stunned markets in January by adding negative interest rates to its massive asset-buying program in a fresh effort to accelerate inflation to its 2 percent target.

But the move has failed to improve public sentiment or arrest an unwelcome rise in the yen that hurts exports and weighs on inflation by pushing down import costs.

Anemic inflation has forced the BOJ to push back the expected timing for hitting its price target to around early 2018, though many analysts say even the new forecast is too ambitious, given slow wage growth and a sluggish economy.

Reporting by Leika Kihara; Additional reporting by Yoshifumi Takemoto and Kaori Kaneko; Editing by Eric Meijer