Japanese consumer prices fell slightly more than expected in May and June, government figures showed on Friday, a reminder that the country has yet to halt five years of deflation even as the economy recovers. No sign of a change in the trend of moderately falling prices meant the Bank of Japan (BOJ) kept its ultra-loose monetary policy unchanged at Friday's policy-setting meeting. The core Tokyo-area CPI for June, a leading indicator for nationwide prices, was down 0.1 percent from the same month a year earlier, falling short of a consensus market forecast that it would be flat. "The solid economic growth rate is narrowing the supply/demand gap and these CPI figures do not change our view that prices are bottoming out," said Toru Sakane, an economist at BNP Paribas.
"Having said that, prices won't start rising so easily. After July, the effect of last year's tobacco tax hike will fade out, and the rise in oil prices does not have that great an impact on overall prices." The nationwide consumer price index (CPI), closely watched by the central bank as a criterion for policy change, was down 0.3 percent in May from a year earlier, compared with economists' average forecast of a 0.2 percent decline. Bond yields fell after the data poured cold water on inflationary expectations. The yield on the 10-year government bond was down four basis points at 1.865 percent in early afternoon trade. Japan's economy has been growing at its fastest clip in more than a decade, fuelling speculation that the BOJ may soon end its ultra-easy policy and pushing bond yields sharply higher.
NO POLICY CHANGE SEEN
The BOJ has pledged to maintain its so-called "quantitative easing" policy until the core nationwide CPI is steadily rising. No change was expected at Friday's meeting, and the central bank's Policy Board voted unanimously to keep the BOJ's target volume of current account deposits parked at the BOJ at 30-35 trillion yen ($280-327 billion). While the CPI could briefly interrupt its decline in the coming months, economists say such a rise is unlikely to be sustainable or strong enough to force the BOJ into an early change in monetary policy. Analysts had forecast that Tokyo prices in June could be unchanged from the same month a year earlier, avoiding a decline for the first time in 57 months, due in part to rising gasoline prices. Gasoline prices comprise about 0.04 percent of CPI. For June Tokyo-area CPI, costs related to automobiles -- namely gasoline -- rose 1.0 percent, reflecting the impact of rising crude oil prices.
Regular gasoline prices rose 5.8 percent from a month earlier, while prices of premium gasoline gained 5.6 percent from May, a government official said. Gasoline prices may be rising, but they are likely to be offset as other sectors still find it difficult to pass on costs to the final consumer, said Shuji Shirota, an economist at Dresdner Kleinwort Wasserstein. "It shows just how persistent deflationary pressures are," he said. Still, financial markets will be closely scrutinising BOJ Governor Toshihiko Fukui's assessment on prices and long-term interest rates when he speaks after Friday's policy meeting. On a seasonally adjusted basis, the June Tokyo-area core CPI fell 0.1 percent from May, while the May nationwide core CPI was down 0.2 percent from April. ($1=107.20 Yen)///