TOKYO (Reuters) - Japan’s core consumer prices marked the first annual drop since the central bank deployed its massive stimulus programme more than two years ago, casting further doubt on whether heavy money printing alone can accelerate inflation to its 2 percent target.
While the data will keep alive market expectations of further easing, key cabinet ministers signalled their reluctance to offer more monetary or fiscal support as they struggle to boost growth with dwindling policy options.
The core consumer price index, which includes oil but excludes volatile fresh food costs, fell 0.1 percent in August from a year earlier after flat growth in July, official data showed on Friday, matching a median market forecast.
It was the first decline since April 2013, when BOJ Governor Haruhiko Kuroda launched his massive asset-buying programme dubbed “quantitative and qualitative easing” (QQE), a sign his sweeping campaign has failed to accelerate inflation toward his ambitious target.
The data adds to a recent run of poor indicators that showed the world’s third-largest economy struggling to emerge from a second-quarter contraction as China’s slowdown and slow wage growth hurt exports and household spending.
“Further monetary easing is necessary sooner or later,” said Junichi Makino, chief economist at SMBC Nikko Securities. “If so, there’s not much point delaying it,” he said, adding that he expects the BOJ to ease either next month or in April next year.
Japan’s economy shrank in April-June and some analysts warn of the chance of another contraction in the current quarter as fears over China’s slowdown jolt markets.
Many analysts expect prices to slide in coming months due largely to a renewed drop in oil costs. Kuroda has said the BOJ will look through the effect of the oil price rout and won’t act as long as a steady recovery keeps other prices in an uptrend.
When stripping away the effect of energy and volatile food costs, consumer inflation accelerated to 0.8 percent in August from 0.6 percent in July. A total of 339 items saw prices rise compared with 131 that saw prices fall, as consumers paid more for goods ranging from rice cookers, hotel bills to chocolate.
With the recovery itself under threat, however, the BOJ is under pressure to act. While most analysts expect the BOJ to hold off on action until next year, some see the chance of easing next month, a Reuters poll showed.
Policymakers are putting a on brave face. Finance Minister Taro Aso said on Friday the government wasn’t considering additional fiscal spending, while Economics Minister Akira Amari stopped short of demanding further BOJ easing.
The remarks followed Prime Minister Shinzo Abe’s declaration on Thursday that Japan was no longer in deflation as he laid out his new three arrows of “Abenomics,” which analysts criticised as lacking substance.
Some analysts warned that expanding a stimulus programme that has had little success in accelerating inflation won’t do the trick, with prices swayed largely by external factors beyond the BOJ’s control such as oil and currency swings.
“QQE initially had an enormous psychological effect by pushing up stock prices and weakening the yen,” said Koichi Haji, chief economist at NLI Research Institute.
“But the reality is that monetary policy isn’t a silver bullet.”
Additional reporting by Stanley White and Tetsushi Kajimoto; Editing by Chris Gallagher and Eric Meijer