Japan prices fall, mild deflation to persist

Fri Jan 27, 2012 9:36am EST
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By Kaori Kaneko

TOKYO (Reuters) - Japan's core consumer prices fell for the third consecutive month in the year to December, and mild deflation is expected to persist this year as energy prices stabilize and worries about Europe's debt crisis suppress wage growth and economic activity.

Core consumer prices declined an annual 0.1 percent, matching the median estimate, and a narrower measure that excludes both food and energy also fell in a sign that Japan continues to grapple with a strong yen, which pushes down import prices and makes exporters reluctant to raise salaries.

Retail sales fell 1.2 pct in 2011, the first fall in two years, and auto and machinery equipment sales posted record falls in the series, which dates back to 1980. But sales rose an annual 2.5 percent in December, the biggest increase in 16 months.

The Bank of Japan and the government concede that the economy is in a lull, and they could come under increasing pressure to support it with currency intervention and monetary policy easing as Europe's debt crisis weighs on external demand.

Europe's downturn could offset the economic benefits of rebuilding the country's earthquake-damaged northeast coast.

"The stagnation of other developed countries is likely to push back the timing of Japan beating deflation from the mid-2010s as originally thought to the late 2010s," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"The BOJ will need to keep its ultra-easy stance in the meantime. If risks from the euro-zone debt crisis heighten, it could move for an additional easing in the near term."

Japan's core consumer price index (CPI) includes oil products but excludes volatile prices of fresh fruit, vegetables and seafood.   Continued...

<p>A woman looks at bags displayed inside a shop in Tokyo January 27, 2012. REUTERS/Toru Hanai</p>