BOJ may further ease policy as deflation concerns grow on stagnant CPI data

Japan's consumer prices remained flat in January compared to the same period a year earlier, as a protracted downturn in energy prices and a comparatively firm yen may lead the key gauge to enter negative territory and the central bank to intervene, data from the Ministry of Internal Affairs and Communications showed Friday.

The consumer price index (CPI) reading in the recording period, which excludes volatile fresh food prices, stood at 102.6 against the 2010 base of 100, the statistics bureau said.

The data set showed that energy prices had fallen 10.7 percent in the recording period, amid an ongoing slump in global prices for crude oil, while gasoline prices in Japan tumbled 16.6 percent.

Following more than a 22 percent surge in the previous month, TV prices rose 15.8 percent, the ministry said, with food prices logging an increase of 2.1 percent.

The latest reading follows a negligible 0.1 percent rise in the previous two months, underscoring the Bank of Japan's (BOJ) struggle to combat decades of rampant deflation in Japan and achieve its 2 percent inflation target, despite unrolling a number of qualitative and quantitative easing measures.

Such measures, most recently, included the BOJ plunging its interest rate into negative territory in a bid to shore up the economy which contracted in the last quarter, as falling oil prices, waning domestic consumption and sluggish imports, continued to impact overall growth and the bank's reflationary efforts.

Some analysts noted Friday that the corporate goods price index in Japan, on a monthly, quarterly and annual basis, is being more comprehensively tracked by the BOJ and finance ministry of late, as these supply-side price pressures and decreases in the index often precede a downward movement in Japan's CPI.

If a drop in the CGPI is followed by a decrease in the CPI, concerns about deflation may prompt the BOJ to unroll more monetary easing measures, with economists Friday saying this move may be imminent, with the central bank possibly opting to further lower its interest rate into negative territory.

Such speculation is based on a comparatively firm yen sending energy prices lower, compounded by a prolonged slump in oil prices worldwide, and import prices of domestic commodities and goods likely to drop henceforth.

"There is not much momentum in the economy to push up prices and the bad news is that the prospects for inflation have worsened with yen gains, weak consumer spending and the economy overall," Norinchukin Research Institute's chief economist Takeshi Minam said.

Other economists maintained that the gauge will likely enter negative territory over the course of the next two months.

In addition, analysts here said that the European Central Bank (ECB) likely rolling out further easing measures - including further cuts to its deposit rate and an expansion of bond purchases - in the face of private sector banking concerns and low inflation rates in the single-currency region, and the U.S. Federal Reserve holding fire on a rate hike, would add pressure on the BOJ to further ease its policy in a bid to ward off deflation.

Such a scenario is underscored by the ministry's data also showing on Friday that the core CPI for Tokyo's 23 wards in February, widely viewed by the BOJ, government and economists as a barometer for future price moves nationwide, dropped 0.1 percent from a year earlier to 101.3, marking the second successive monthly drop.

"We will carefully watch how moves in financial markets will affect Japan's real economy and we won't hesitate to respond if needed," BOJ Governor Haruhiko Kuroda said in parliament this week.