Japan plans to switch inflation gauge; may up pressure on BOJ

Tue Jul 9, 2013 7:48am EDT
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By Izumi Nakagawa

TOKYO (Reuters) - The Japanese government plans to adopt a different measure of inflation to the central bank's, an official told Reuters, in a move that could mean it will take longer for Japan to be declared free of deflation and give ammunition to politicians advocating loose policies.

Prime Minister Shinzo Abe has made victory over nearly two decades of falling prices a top policy pledge. His "Abenomics" package of government spending and loose money from the Bank of Japan have sent stock prices sharply higher and the yen lower this year.

Whereas the central bank targets a 2-percent year-on-year rise in the core consumer price index, a measure that excludes volatile prices of fresh food, the government plans to use "core-core" CPI, which also excludes energy costs.

The change will effectively raise the bar for Abe's inflation goal, as it means that higher energy prices will be taken out of the equation.

The official, who was involved in the decision to switch to "core-core", said the change was meant to help ensure that the world's No. 3 economy truly breaks the grip of deflation.

"Unless we have price rises that aren't temporary, that won't reverse, we can't say we've escaped from deflation," the official said on condition of anonymity.

The change could result in more pressure being put on the central bank to keep flooding the market with yen as the inflation target becomes harder to achieve.

It could also complicate the government's plans to raise the nation's sales tax.   Continued...

Japan's Prime Minister Shinzo Abe, who is also leader of the ruling Liberal Democratic Party, speaks to voters atop a campaign van in Tokyo July 4, 2013, at the start day of campaign the July 21 Upper house election. REUTERS/Toru Hanai