Japan Records Fourth Straight Year Of Deflation


Japan's annual inflation rate slipped by 0.1 per cent in 2012, showed the latest government data on Friday, placing further pressure on its central bank to introduce greater monetary stimulus following the fourth straight year of sliding consumer prices.

According to the government data, core consumer prices, excluding fresh food, fell for the seventh time in eight months – by 0.2 percent – in December last year, matching previous forecasts made by Bloomberg and Reuters; but underscoring the difficulty the Bank of Japan will face to meet a 2 percent inflation target next year.

Meanwhile, core consumer prices in central Tokyo – seen as a leading indicator of national price moves – fell by 0.5 percent in January this year, compared to a year earlier, suggesting no let up to Japan's deflationary woes.

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Earlier this week, Deputy Economy Minister Yasutoshi Nishimura had admitted that reaching the government’s inflation target would be difficult without further easing, including greater devaluation of the yen.

The yen has already slipped to a two-and-a-half-year low against the dollar, but Nishimura insisted that a level of 100 yen per dollar - 90.42 yen/dollar now – would not be a concern.

Many analysts thus expect Prime Minister Shinzo Abe to call for bolder stimulus steps by the Bank of Japan to pull the economy out of deflation, despite uneasiness on the central bank’s part.

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Upward pressure on prices was weak in December, but we can expect price declines to narrow as the yen has weakened and this will eventually push up oil and gasoline prices," told Shuji Tonouchi, a senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities, to Reuters.

"The BOJ's additional easing won't start until next year, but we could see the BOJ consider some new steps once the government appoints the next BOJ governor and deputy governors,” he said.

Nevertheless, the weakening of the yen has been met with condemnation overseas, especially from Europe, who claim that the Japan government are currently engaging in competitive currency devaluation – which may lead to a “currency war”.

We are witnessing disturbing abuses... where the new government is interfering massively in the affairs of the central bank, calling forcefully for a more aggressive monetary policy," warned the head of Germany's Bundesbank Jens Weidmann on Monday, as cited by AFP, referencing Japan as one of his specific examples.

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Japanese Vice Finance Minister Takehiko Nakao however hit back at critics, arguing that Japan’s focus was on grappling with the deflation, rather than deliberately manipulating the exchange rate.

"Japan has no intention whatsoever of competitive devaluation of the yen. Let me reiterate that the recent depreciation of the yen should be regarded as a correction from the one-sided and excessive appreciation that took place up to last year,” Nakao said.