July 26, 2012 / 11:59 PM / 7 years ago

Japan core CPI falls, deflation set to persist

TOKYO (Reuters) - Japan’s core consumer prices unexpectedly fell in June from the same period a year earlier as energy prices weakened, and mild deflation is likely to persist given companies are reluctant to raise wages due to uncertainty about the global economy.

The data suggest that the Bank of Japan will remain under pressure to ease monetary policy to ensure prices start rising and to shield the economy from any damage from a strong yen.

The 0.2 percent annual decline in core consumer prices in June compared with the median estimate for a flat reading and a 0.1 percent decline in the year to May.

In a more troubling sign, the so-called core-core inflation index, which excludes food and energy prices and is similar to the core index used in the United States, fell in June, showing that improvement in domestic demand from last year’s earthquake has been slow to feed into prices.

“The core-core CPI shows that overlying demand is not that strong and deflation will remain for a while,” said Michinao Okachi, economist at Mizuho Research Institute.

“The BOJ seems to be more focused on currency moves than on consumer prices. The impact of currencies on consumer prices is limited, but if downside risks from Europe increase, more easing may be necessary.”

The core-core inflation index, fell 0.6 percent in the year to June, data from the internal affairs ministry showed on Friday.

Core consumer prices in Tokyo, available a month before the nationwide data, fell 0.6 percent in the year to July. That compares with the median estimate for a 0.7 percent annual drop. JPCPIT=ECI

The BOJ set a 1 percent inflation target and eased policy via an increase in asset purchases in February. It followed up with another easing in April to show its resolve to beat deflation. The central bank next meets August 8-9.

Consumer prices could rise by 1 percent not long after fiscal 2014 as the output gap gradually narrows, BOJ Governor Masaaki Shirakawa said earlier this month.

However, two new members of the central bank’s policy board have said this forecast may be overly optimistic, suggesting differences could emerge over the scale of additional monetary easing.

Japan’s economy is expected to outperform most other developed nations this year thanks to solid domestic demand, but analysts have slashed forecasts for factory output as the global slowdown becomes more pronounced, according to a Reuters poll earlier this month.

Japan’s economy, the world’s third-largest, is set to grow 2.2 percent in the year to next March, according to a Reuters poll of economists, slightly slower than the 2.3 percent pace seen in a similar survey in June.

Writing by Stanley White; Editing by Tomasz Janowski

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