Japan: Japan on its way out of deflation
February 25, 2011
In January, the core consumer price index, which strips out volatile fresh food prices, dropped 0.4% over the previous month. The figure, which came in below December's flat reading, still beat market analysts' expectations of a 0.5% decline. As a result, annual core inflation maintained the upward trend seen over the previous months, stepping up from minus 0.4% in December to minus 0.2%. Meanwhile, the overall consumer price index dropped a less severe 0.2% over the previous month. The most important drivers behind the less pronounced price drop were increases in food prices, in particular fresh food (+2.7% month-on-month), which mitigated the impact of lower prices for clothing and footwear (-6.9% mom). Owing to the subdued reading, annual inflation remained unchanged at the flat reading tallied in December. The Bank of Japan (BoJ) expects the economy to exit deflation in the fiscal year ending in March 2012 and recently raised its forecast for average inflation to 1.0%. For the fiscal year 2012, ending in March 2013, the Bank anticipates inflation to moderate to 0.7%, which is below the 1.0% considered by the BoJ to represent price stability.