UPDATE 1-Weak demand keeps Japan in deflation, exit far off

(For more stories on the Japanese economy click [ID:nECONJP])

* Dec core CPI falls 1.3 pct yr/yr, smaller drop than in Nov

* Index stripping out energy costs falls faster

* Industrial output rises on firm exports to Asia
(Adds details, background)

By Stanley White and Tetsushi Kajimoto

TOKYO, Jan 29 (BestGrowthStock) – Japan’s core consumer prices fell
from a year earlier for the 10th straight month in December,
meaning the government will likely keep pushing the Bank of Japan
to ease monetary policy more.

The pace of decline slowed from November as the effect of oil
price falls faded, while factory output continued to rise on the
back of solid demand for Japanese goods in Asia.

But the so-called “core-core” consumer price index, which
strips out the effect of energy costs, fell at a faster pace in
December in a sign of anemic demand. That will worry policymakers
who fear a return to recession ahead of elections in the summer.

“The pace of decline in the core-core CPI accelerated and we
should take this to mean that deflation remains a problem,” said
Yasuo Yamamoto, senior economist at Mizuho Research Institute.

“The BOJ needs to continue its easy monetary policy. For the
government’s part, they may need to consider another stimulus
package, as the economy is stagnating.”

But Prime Minister Yukio Hatoyama’s government has little
room to boost spending further as the national debt is now almost
twice as big as the country’s annual gross domestic product.
Credit ratings agency Standard and Poor’s this week warned that
it may cut the country’s rating. [ID:nSGE60P08I]

Parliament will soon debate the government’s record budget
for the year starting in April and the threat of a credit ratings
downgrade by Standard and Poor’s means

The core CPI, which includes oil products but excludes
volatile prices of fresh fruit, vegetables and seafood, fell 1.3
percent in December from a year earlier, matching market
forecasts. It was smaller than a 1.7 percent drop in November.
[JPCPI=ECI]

The so-called core-core inflation index, similar to the core
index used in the United States, fell 1.2 percent in December
from a year earlier after a 1.0 percent drop in November.

Industrial output rose 2.2 percent in December as
manufacturers continued to benefit from a strong economic
recovery in Asia, although the increase was smaller than the 2.5
percent forecast by economists. [JPIP1=ECI]

The BOJ forecast on Tuesday prices would fall less than
earlier thought but remained open to further policy easing in the
face of renewed government calls for more support for a fragile
economic recovery. [ID:nTOE60O0BC]

The central bank, under pressure from the government, has
toughened its stance on deflation and in early December decided
to offer commercial banks more short-term funds. [ID:nT374859]

The government and BOJ agree stimulating demand is essential
to conquering deflation, but the BOJ has already committed to
keeping rates at a very low level and the government’s support
for households could take a long time to have an impact.

Stock Market Advice

UPDATE 1-Weak demand keeps Japan in deflation, exit far off