Japan's persistent deflation to force central bank to ease policy
Japan’s core consumer prices fell 1.2 percent in February from a year earlier, marking a full year of grinding deflation and suggesting the Bank of Japan may need to ease monetary policy again in the next few months.
The so-called core-core consumer price index, Japan’s narrowest measure of consumer inflation that strips out both energy and volatile food costs, also logged a near-record annual fall as weak household demand force companies to cut prices.
Many analysts expect the debt-laden government, worried about an economic downturn ahead of an upper house election likely in July, to prod the central bank into easing policy further. Finance Minister Naoto Kan hinted as much by saying more efforts are needed to stop price declines.
The central bank’s most likely response is to extend the duration of a special funding operation it introduced in December, and that decision could come within the next three months, economists and analysts say.
“It’s still a long way to go before Japan pulls out of deflation. The BOJ has said it will patiently maintain very easy monetary policy. They really need to do so for a very long time for the country to escape deflation,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
“Once the government comes up with a long-term plan for fiscal discipline in June, the BOJ should increase its long-term government bond purchases.”
The 1.2 percent fall in the core consumer price index, which includes oil products but excludes volatile food costs, matched a median market forecast. The pace of drop slowed slightly from January but retailers remain under pressure to cut prices while coping with a profit squeeze to woo consumers who are tightening belts amid falling wages.
The decline in core CPI is likely to widen from April when the government makes public high schools free to put more money into the hands of households and spur personal spending.
The government said on Friday it would reflect this move in its CPI calculations from April.
Analysts said they expect this to push down annualized core CPI by about 0.5 percentage point, adding that they would have to disregard such technical factors to keep track of actual price trends.
The core-core inflation index, similar to the core index used in the United States, fell 1.1 percent from a year earlier, after record falls of 1.2 percent in January and December.
Japanese government bonds shrugged off the data. Yields on benchmark 10-year JGBs rose to 1.385 percent, the highest since mid-November, after a poorly received auction of seven-year U.S. Treasury notes.
“The pace of decline in prices is slowing somewhat, but prices are still falling,” Finance Minister Kan told reporters after the data.
“More efforts will be needed in order to escape deflation.”
Kan also said he wanted to push forward debate on how to use 1 trillion yen ($10.78 billion) in reserves in the budget for the fiscal year from April 1, which the parliament passed a day earlier.
Kan stopped short of saying the government plans to launch extra stimulus, because Japan’s outstanding debt is almost twice the size of its gross domestic product, leaving little room for fiscal spending.
Ratings agencies have threatened Japan with a downgrade if it doesn’t show more fiscal discipline, so the government has been leaning on the BOJ to support the economy.
The BOJ loosened monetary policy earlier this month by doubling to 20 trillion yen the amount of loans it offers commercial banks for three months at 0.1 percent, which is the benchmark rate. That decision came after Kan and other cabinet members prodded the BOJ on an almost daily basis.
The BOJ is virtually alone in easing monetary policy among major central banks, although other G7 authorities are showing little inclination to tighten policy either.
The BOJ is likely introduce a similar six-month funding scheme in the next few months to lower term rates further, economists say. The central bank’s policy board next meets on April 6-7, and then on April 30, when it reviews policy and its economic and price forecasts in a twice-yearly report.
The BOJ expects deflation to last until early 2012, but has said price falls will ease as the economy recovers and won’t affect much the public’s long-term price expectations.
Deflation hurts the economy as households hold off spending on the view that prices will fall further in the future, forcing companies to cut prices to lure them to spend.
But BOJ policy board member Hidetoshi Kamezaki warned on Thursday that deflation is starting to affect public perceptions about future price moves and may make it even more difficult for Japan to escape from persistent price falls, suggesting the bank could take additional easing measures.
Source: Reuters