July 26, 2013 / 1:03 AM / 6 years ago

Japan consumer prices rise at fastest pace in 5 years, bodes well for BOJ

TOKYO (Reuters) - Japanese consumer prices rose in June at their highest annual pace in nearly five years in an early sign of an end to persistent deflation, boding well for the central bank’s bold stimulus plan to achieve its 2 percent inflation target in two years.

The 0.4 percent rise in core consumer prices, which is slightly higher than a median market forecast for a 0.3 percent increase, was largely due to a rise in electricity bills and a weak yen that inflated the cost of gasoline imports.

But it is an encouraging sign for the Bank of Japan, keen to end 15 years of grinding deflation, as it suggests more companies are optimistic enough about the economy to believe they can raise prices on goods or at least not cut them.

The data is also a boost to Prime Minister Shinzo Abe’s sweeping pro-growth policies that aim to pull the world’s third largest economy out of stagnation.

Abe’s government, which is driving an aggressive policy mix of monetary and fiscal stimulus to foster sustainable long-term growth, has already seen positive signs as first quarter data showed Japan was the fastest growing major economy in the world.

The increase in the core consumer price index (CPI), which excludes fresh food but includes energy costs, marked the highest annual pace since a 1.0 percent rise in November 2008. It is the first time in 14 months that consumer prices have risen.

In May, prices neither rose nor fell.

Tokyo core CPI, a leading indicator of nationwide prices, rose 0.3 percent in July after a 0.2 percent increase in June, matching the median forecast, suggesting that Japan will see prices continue to rise in the coming months.

The BOJ unleashed an intense burst of monetary stimulus on April 4, promising to double the supply of money through aggressive asset purchases to meet its 2 percent inflation target in roughly two years.

Many analysts expect prices to gradually rise - reflecting improvements in the economy - but they view the two-year timeframe for achieving the inflation goal as too ambitious.

Editing by Shri Navaratnam

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