Japan deflation ebbs, output up; BOJ target still elusive

Fri May 31, 2013 6:50am EDT
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By Tetsushi Kajimoto and Izumi Nakagawa

TOKYO (Reuters) - Japan's factory output accelerated in April and deflation abated a bit as a weaker yen and firmer overseas demand boosted growth, boding well for Prime Minister Shinzo Abe's efforts to shake the world's third-largest economy out of nearly two decades of falling prices and sluggish growth.

But core consumer prices continued to fall and manufacturers forecast further weakness ahead, government data showed on Friday, underscoring the challenges the Bank of Japan, under new Governor Haruhiko Kuroda, faces in meeting its 2-percent inflation target.

"The deflationary trend shows no signs of changing," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance in Tokyo. He forecast the economy will continue to recover through the latter part of the fiscal year to March 2014.

"Expectations for deflation, deeply embedded among the public, are very persistent," Kodama said. "It appears quite difficult for monetary easing implemented by Governor Kuroda to achieve a positive cycle of inflation and economic recovery."

Still, tentative signs are growing that Abe and the BOJ may be starting to win the battle against deflation.

Tokyo prices turned higher for the first time in more than four years. And Apple Inc (AAPL.O: Quote) raised the prices of iPads and iPods in Japan on Friday, following the likes of luxury jewelry maker Tiffany & Co (TIF.N: Quote), German appliance maker Miele and Volkswagen AG (VOWG_p.DE: Quote) in raising prices as a result of the weaker yen.

Kuroda's BOJ unleashed the world's most intense burst of stimulus in April, promising to inject $1.4 trillion into the economy in less than two years to halt the yen's rise and generate inflation of 2 percent.

The move has bolstered Japanese share prices to five-year highs. But the massive scale of the BOJ's buying jolted bond markets and pushed up yields, casting doubt on the effectiveness of its policy aimed at slashing borrowing costs.   Continued...

A worker walks at an industrial zone in Urayasu, near Tokyo March 29, 2013. REUTERS/Toru Hanai