Japanese Consumer Prices Fall at Slower Pace, May Not Ease Pressure on BOJ

Japan’s consumer prices fell at a slower pace in May, a moderation that may be insufficient to ease government pressure on the central bank to fight deflation.

Prices excluding fresh food slid 1.2 percent from a year earlier, easing from a 1.5 percent decline in April, the statistics bureau said today in Tokyo. The median estimate of 24 economists surveyed by Bloomberg was for a 1.3 percent drop.

“The report showed deflation still persists,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo. “Whether the central bank takes additional easing measures depends on how strong the government’s demands will be.”

Prime Minister Naoto Kan released a plan for faster growth last week that urged the Bank of Japan to make “utmost efforts” to defeat the price declines that are hampering the economic recovery. Some central bank policy makers noted last month that an improvement in domestic demand is beginning to ease the pace of the drop, meeting records show.

The yen traded at 89.62 per dollar at 11:05 a.m. in Tokyo from 89.56 before the figures were released. Japan’s currency has gained more than 4 percent this quarter, adding to deflationary pressure by lowering the cost of imports. The yield on Japan’s 10-year bond rose two basis points to 1.145 percent, after reaching the lowest level since 2003 yesterday.

Impede Growth

Falling prices can impede economic growth by prompting companies and households to postpone spending. Seiyu Ltd., a supermarket operator owned by U.S.-based Wal-Mart Stores Inc., this week said it will offer discounts on 7,100 items of clothing, food and household goods until early August to entice people to spend their summer bonuses.

Kan said on June 14, days after taking office, that the government and central bank need to work together to overcome deflation. Finance Minister Yoshihiko Noda said this month that he wants prices to rise more than 1 percent.

The central bank has kept the benchmark interest rate at 0.1 percent since December 2008, and has since injected cash into the economy by providing low-interest loans to banks. This month it unveiled a 3 trillion-yen program to encourage lending to companies.

“The Bank of Japan is expected to maintain its accommodative policy stance, and a rate increase will be delayed at least until fiscal 2012,” said Mitsumaru Kumagai, a senior economist at Daiwa Institute of Research in Tokyo. “Deflationary pressure is still strong.”

Export-Led Recovery

Some Bank of Japan members observed last month that price declines have “clearly” moderated, reflecting a narrowing of slack in the economy, according to minutes of their May 20-21 meeting. The output gap, a measure of excess supply over demand, narrowed for a fourth quarter in the January-to-March period.

The export-led recovery “is finally starting to spread and is alleviating the severity of deflationary pressure,” Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo, said before today’s report. “The pace of price drops will keep easing for the time being.”

The slide in prices was even smaller when excluding a waiver of high-school fees that the government introduced in April to support households. The waiver pushes down nationwide core prices by 0.54 percentage point, the bureau estimates.

“We can assume price declines hit bottom” in the first quarter when excluding the school-tuition factor, Takehiro Sato, chief Japan economist at Morgan Stanley MUFG Securities Co. in Tokyo, said before the report. Even so, he added, “prices won’t surge above water until around late 2013.”

Tokyo Prices

Prices excluding energy and food, a gauge that mirrors the U.S.’s inflation index, fell 1.6 percent in May, matching the previous month’s record drop, the statistics bureau said. The tuition fee waiver accounted for about half of the decline.

In Tokyo, core prices slid 1.3 percent in June from a year earlier, after falling a revised 1.5 percent in May. Figures for the capital are released a month earlier than nationwide data, making them a harbinger of inflation trends.

Even if prices resume rising next year, the gains will be driven by rising energy costs and the economy’s reliance on exports and “won’t mean an end to deflation at all,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. “Japan can’t overcome its chronic deflation unless it resolves the structural problems causing it: the aging and shrinking population and the shortage of demand.”

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

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