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Japan’s CPI rose 3.3 per cent in June from a year earlier, matching a median market forecast and slowing from a 3.4 per cent gain in May. Reuters pic

JAPAN’S core consumer inflation eased slightly in the year to June, highlighting the challenges the central bank faces in meeting its two per cent inflation target some time next year.

But the slowdown will come as no surprise to the Bank of Japan (BoJ), which has said inflation will continue to slow to around one per cent in coming months as an increase in import costs from a weak yen fades.

The BoJ expects inflation to pick up again as a tight labour market lifts wages.

The central bank is thus in no mood to consider expanding stimulus any time soon, although some analysts warn it may face pressure to act if the economic recovery loses momentum and fails to nudge up prices late this year.

“Exports are weak and household spending — hit by the April sales tax hike — won’t bounce back so strongly, which means the economy lacks a strong driver ahead,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

“The economy may not recover as strongly as expected, which will certainly affect price moves,” he said, predicting that the BoJ may ease policy in April next year if inflation fails to approach two per cent by then.

The nationwide core consumer price index (CPI), which excludes volatile prices of fresh food but includes prices of oil
products, rose 3.3 per cent in June from a year earlier, government data showed yesterday, matching a median market forecast and slowing from a 3.4 per cent gain in May.

Excluding the impact of a sales tax hike implemented in April, core consumer inflation slowed to 1.3 per cent in the year to June from 1.4 per cent in May, largely because rises in energy costs moderated from last year’s sharp increases.

In one positive sign, core-core prices, which exclude both fresh food and energy, actually accelerated slightly, offering a hint of inflationary pressure in the economy.

The data showed prices rose for nearly 90 per cent of components making up core CPI, including television sets and personal computers, suggesting that companies feel more comfortable raising prices with household spending holding up for now.

“There are signs the current slowdown in inflation will bottom out in the first half of next fiscal year,” said Shuji Tonouchi, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“The BoJ can still argue that prices are on track and that inflation will accelerate again.”

Core CPI, which is similar to core consumer prices in the United States, rose 2.3 per cent in the year to June, more than a 2.2 per cent annual rise in the previous month.

Meanwhile, the government shared the BoJ’s view that prices are rising moderately in its annual economic “white paper” yesterday, though it kept up pressure on the central bank to maintain its massive stimulus for some time as inflation remains well below its two per cent target.

“The government has not officially declared an end to deflation, so I think that it is too early to debate about an exit strategy (from the easy policy),” Economics Minister Akira Amari told reporters after the release of the CPI data.

The government also warned the central bank to take care in communicating its eventual exit from its massive easing policy, citing the market turmoil experienced when the US Federal Reserve disclosed the initial tapering from its quantitative easing policy.

Treading with unusual directness into the territory of the independent BoJ, the government said it expects the BoJ to continue its easing policy for some time as inflation remains well below target.

“When the market’s view changes significantly, it is necessary to keep in mind that volatility in long-term yields could rise or their level could experience large changes,” the report said, citing the volatile reaction to the Fed’s announcement that it would start to taper its asset purchases. Reuters

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