Japan inflation slows and output slips, keep BOJ under pressure

Fri Dec 26, 2014 6:19am EST
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By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) - Japanese annual core consumer inflation slowed for a fourth straight month in November due largely to sliding oil prices, highlighting the challenges the central bank faces in achieving its 2 percent inflation target.

Factory output unexpectedly fell and real wages marked the steepest drop in five years, underscoring the fragility of the recovery and dealing a blow to premier Shinzo Abe's stimulus policies aimed at pulling the economy out of stagnation.

The core consumer price index (CPI), which excludes volatile fresh food but includes oil products, rose 2.7 percent in November from a year earlier, matching a median market forecast, government data showed on Friday.

Stripping out the effects of a sales tax hike in April, core consumer inflation was 0.7 percent, slowing from 0.9 percent in October and far below the Bank of Japan's 2 percent target.

"While the economy is recovering, falling oil prices and slowing inflation will force the BOJ to ease policy further at some point next year," said Hiroshi Watanabe, senior economist at SMBC Nikko Securities.

In a worrying sign for the central bank, inflation-linked government bond prices JP00190083=MUFG slumped over the past several weeks as investors' inflation expectations hit their lowest since Haruhiko Kuroda became BOJ governor in March 2013.

Japan's economy slipped into recession in the wake of April's tax hike, though analysts expect growth to rebound in the current quarter as exports and output pick up.

Factory output slid 0.6 percent in November after two straight months of gains, largely the effect of big-ticket items such as computer chip-making equipment and boilers boosting October output and confounding market expectations of a 0.8 percent rise.   Continued...

A karaoke store employee dressed as a reindeer tries to attract potential customers outside a Japanese style pub in Tokyo December 25, 2014. REUTERS/Yuya Shino