Japan's core consumer prices flat, deflation risks remain

TOKYO (Reuters) - Japan’s core consumer prices snapped two straight months of declines in June but risks remain for a prolonged economic slump from the coronavirus crisis, which has depressed consumption and raised concerns about a return to deflation.

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The core consumer price index (CPI) was flat, with slower falls in energy prices in June helping the gauge out of negative territory. The reading dashed expectations for a third straight month of decline and followed central bank comments last week that the economy would likely shake off the hit from the pandemic.

Japan lifted nationwide state of emergency measures in late May but has seen a renewed spike in infections in its capital Tokyo, stoking fears of a second wave of infections that could curtail spending in an already weakened economy.

“It is inevitable that the outlook for wage environment will become severe as firms could cut bonuses and payments due to significant deterioration in corporate earnings,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“We can’t expect a V-shaped economic recovery and a lack of demand including that of overseas could become chronic, so downward pressure on prices could strengthen.”

The core CPI, which includes oil products but excludes volatile fresh food prices, was flat in June from a year earlier, government data showed on Tuesday.

That compared with the median market forecast of a 0.1% decline and falls of 0.2% reported in both April and May.

The so-called core-core price index, which excludes food and energy prices and is closely tracked by the central bank as a narrower gauge of inflation, grew 0.4% in June after the same rate of gain in May.

The Bank of Japan’s (BOJ) latest quarterly forecasts showed consumer prices projected to fall 0.5% this fiscal year to next March and stay well below its 2% target through early 2023.

The economy likely contracted more than 20% in April-June as the coronavirus hit global growth and the government shut down the economy from April to late May.

They said recovery in the world’s third-largest economy is expected to be modest as the pandemic exacts a heavy toll on exports, business activity and jobs.

Japan has reported over 25,000 infections and around 1,000 deaths.

Reporting by Kaori Kaneko; Editing by Chang-Ran Kim and Sam Holmes