UPDATE 1-Japan deflation slows on tobacco tax, seen persisting

* Japan Oct nationwide CPI -0.6 pct yr/yr, matching forecast

* CPI decline slows due to cigarette tax hike on Oct. 1

* Excluding tax hike, CPI shows deflation to persist
(Adds details, economist’s quote, graphic)

By Tetsushi Kajimoto

TOKYO, Nov 26 (BestGrowthStock) – Japan’s core consumer prices fell
in October from a year earlier, down for the 20th consecutive
month as persistent deflation, a strong yen and slowing global
growth threaten the economy’s outlook.

Although the pace of deflation narrowed markedly, that was
largely due to a cigarette tax hike that took effect in October,
doing little to ease concerns about the impact of a yen’s rise
and a slowing economy on the underlying price trend.

The Bank of Japan’s (BOJ) forecast for an end to deflation in
the fiscal year starting next April looks unlikely, but since its
benchmark interest rate is effectively at zero, it has little
option but to increase asset purchases if the economy and the
price outlook deteriorate.

“Excluding the effect of the cigarette tax hike, core CPI
continued to fall by a substantial margin, indicating deflation
is entrenched,” said Yoshiki Shinke, senior economist at Dai-Ichi
Life Research Institute in Tokyo.

“The pace of improvements in price falls is likely to slow in
the coming months as the economy is currently at a standstill,
making it nearly impossible for prices to turn to positive growth
in the next fiscal year as the BOJ currently forecasts.”

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Japan CPI, wholesale prices http://link.reuters.com/vub37q

More stories on Japan’s economy [ID:nECONJP]

Tables http://www.stat.go.jp/english/data/cpi/index.htm

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SLOW IMPROVEMENT

The core consumer price index (CPI), which includes oil
products but excludes volatile prices of fresh fruit, vegetables
and seafood, fell 0.6 percent from a year earlier, matching the
median estimate, Ministry of Internal Affairs and Communications
data showed on Friday.

That follows a 1.1 percent decline in September. A cigarette
tax hike that took place on Oct. 1 pushed up October’s core CPI
by around 0.28 percentage point, a government official said.

The so-called core-core inflation index, which excludes food
and energy prices and is similar to the core index used in the
United States, fell 0.8 percent in the year to October. That
compares with a 1.5 percent annual decline in September.

Core consumer prices in Tokyo, available a month before the
nationwide data, dropped 0.5 percent in the year to November
after a 0.5 percent annual decline in the previous month. This
also matched the median forecast. [JPCPIT=ECI]

Deflation has been easing since last summer as the economy’s
recovery from the worst recession in decades has helped to narrow
the output gap, although the pace of improvement has been slow in
recent months.

Japan’s economy is expected to shrink 0.1 percent in the
fourth quarter, according to a Reuters poll, as government
incentives expired for purchases of energy-efficient cars and as
exports slow. [ID:nSLA9ME6I3]

Japan is likely to resume growing next year as export demand
picks up again, economists say, but European debt woes and market
turbulence are risks to the outlook.

The BOJ last month eased monetary policy by pledging to keep
rates effectively at zero until the end of deflation was in sight
and announced a plan to spend 5 trillion yen on assets ranging
from government bonds to corporate debt.

Governor Masaaki Shirakawa has said increasing the size of
the fund is a clear option if the looming economic slowdown
proved worse than expected. But the yen’s retreat from 15-year
highs scaled early this month makes any radical near-term action
unlikely. [ID:nL3E6MI0E3]
(Editing by Edmund Klamann)

UPDATE 1-Japan deflation slows on tobacco tax, seen persisting