25 June 2004, 10:50  Tokyo Core Consumer Prices Declined 0.1% in June (Update8)

Consumer prices in Japan's capital city unexpectedly fell in June, suggesting the central bank may need to keep interest rates close to zero for longer than expected to stamp out six years of deflation. Tokyo's core prices, which exclude fresh food and are an advance indictor of prices nationwide, fell 0.1 percent from a year earlier, the government statistics bureau said. The median of 34 forecasts in a Bloomberg News survey of economists was for no change. Nationwide core prices declined 0.3 percent in May.
Bank of Japan Governor Toshihiko Fukui has pledged to keep the zero-rate policy until consumer prices stabilize and he's certain they won't resume declining. The bank's board voted unanimously at a meeting today to keep rates at zero, where they have been since March 2001, boosting 10-year bond prices. ``It is going to take some time before consumer prices will turn positive,'' said Eishi Yokoyama, an economist at AIG Global Investment Corp. in Tokyo. ``Expectations that deflation is ending are receding.'' The yield on the benchmark 1.6 percent bond due in June 2014 fell 5.5 basis points to 1.855 percent as of 3:09 p.m. in Tokyo, after yesterday rising to 2.5 basis points below an almost four- year high of 1.94 percent reached last week. A basis point is 0.01 percentage point.
Zero Rates
Fukui and his eight board colleagues voted unanimously to keep rates at zero, where they have been since March 2001, at their meeting today. They also kept the target for reserves available to banks at 35 trillion yen ($326 billion). ``We are still a long, long way from moving into a sustained inflationary environment,'' said Huw McKay, an economist at Westpac Banking Corp. ``And that's why they are not going to talk about a reference rate for inflation anytime soon.'' The bank says it needs to see a few months of price rises to be sure higher medical costs and taxes and temporary gains in oil prices aren't causing short-lived increases. Japan's nationwide core prices have risen once since April 1998.
A fall in the price of personal computers, air conditioners and other consumer electronics both nationally and in Tokyo spurred an overall decline in prices even as record global oil prices pushed gasoline prices higher. ``Companies are releasing new models in advance of the bonus season, so the prices of the previous models go down,'' said Junichi Makino, an economist at Daiwa Institute of Research Ltd. ``Goods prices are still falling and so in order for a stable rise in the CPI its important for the price of services to turn around.'' ///www.bloomberg.com

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