Japan's deflation gathers pace as prices extend declines

TOKYO - Japan's core consumer prices fell for a second straight month in May, reinforcing deflation expectations and raising the challenge for policymakers battling to revive an economy reeling from the coronavirus pandemic.

Friday's price data will likely complicate the Bank of Japan's job of restoring growth and inflation, with a raft of recent indicators suggesting the nation is in the grip of its worst postwar economic slump.

Several BOJ board members warned that stronger monetary support and closer policy coordination with the government were needed to prevent Japan from returning to deflation, minutes of the bank's April meeting showed.

"Economic activity is re-opening in some parts of the world and crude futures are rising somewhat," said Yasunari Ueno, chief market economist at Mizuho Securities.

"But the recovery in demand is fragile, keeping inflationary pressure weak," he said.

The nationwide core consumer price index (CPI), which includes oil but excludes volatile fresh food prices, fell 0.2% in May from a year earlier, government data showed on Friday.

That compared with market forecasts of a 0.1% fall and followed a 0.2% drop in April, which was the first year-on-year decline since December 2016.

The BOJ expanded stimulus in March and April, which included a pledge to buy unlimited amounts of bonds to cap borrowing costs at zero.

The central bank kept policy steady this week and governor Haruhiko Kuroda conceded that inflation would remain well short of its 2% target for years to come.

With analysts expecting Japan's economy to suffer an annualised contraction of more than 20% in the current quarter, some BOJ policymakers were concerned that bolder steps are needed to prevent the country from slipping back to sustained period of damaging price declines, the April minutes showed.

"Japan is now facing the risk of deflation, so it's possible to further enhance coordination between fiscal and monetary policies," one BOJ board member was quoted as saying.

The downturn in growth is also likely to have been exacerbated by Japan's state of emergency in April through late May, which prompted people to stay home and businesses to close.

Although businesses have re-opened, analysts warn the eventual economic recovery will likely take many more months to kick in to full gear.

Prime Minister Shinzo Abe has responded with two stimulus packages totalling $2.2 trillion, but many businesses have complained that red tape has slowed critical support measures.

Source: https://tinyurl.com/y7udgomg

This article was originally published on investing.com

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