Japan prices stop falling but BOJ inflation goal seen a tall order

Thu Jun 27, 2013 11:02pm EDT
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By Tetsushi Kajimoto and Kaori Kaneko

TOKYO (Reuters) - Japan's consumer prices stopped falling in May and labor demand reached its strongest level in five years, but the Bank of Japan's time frame for achieving a 2 percent inflation target still appears unlikely.

Industrial output rose at its fastest pace since 2011, in a sign of strength in the corporate sector, but an unexpected fall in household spending may raise some concerns about activity.

On the whole, the data on Friday signaled steady economic growth, but it may take more time to achieve sustained rises in prices even as the government's expansionary policies are making some progress towards ending 15 years of deflation.

"The results are mostly due to energy prices. The output gap is shrinking, but the core-core CPI shows that final demand is still weak," said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting.

"It's possible for the BOJ to ease (policy) again later this year, when it becomes clear that there's not enough progress in reaching its price target."

Core consumer prices, which exclude fresh food but include energy, were unchanged in May from a year earlier, matching the median estimate from a Reuters poll.

It was the first time in seven months that prices did not fall. Prices fell an annual 0.4 percent in April.

Japan's core-core CPI, which excludes both food and energy, fell 0.4 percent in the year to May, following a 0.6 percent annual decline in April, the government data showed.   Continued...

A man shops inside a drugstore in Tokyo June 28, 2013. REUTERS/Yuya Shino