UPDATE 3-Japan deflation grinds on, may pressure BOJ to ease

* Nationwide core CPI falls 1.2 pct yr/yr in February

* Core-core CPI hovers near record annual fall

* Analysts say BOJ not done yet in loosening policy

* Finmin says more efforts needed to beat deflation

* CPI falls to widen as high schools become free in April
(Adds details)

By Tetsushi Kajimoto and Rie Ishiguro

TOKYO, March 26 (BestGrowthStock) – Japan’s core consumer prices fell
1.2 percent in February from a year earlier, marking a full year
of grinding deflation and suggesting the Bank of Japan may need
to ease monetary policy again in the next few months.

The so-called core-core consumer price index, Japan’s
narrowest measure of consumer inflation that strips out both
energy and volatile food costs, also logged a near-record annual
fall as weak household demand force companies to cut prices.

Many analysts expect the debt-laden government, worried about
an economic downturn ahead of an upper house election likely in
July, to prod the central bank into easing policy further.
Finance Minister Naoto Kan hinted as much by saying more efforts
are needed to stop price declines.

The central bank’s most likely response is to extend the
duration of a special funding operation it introduced in
December, and that decision could come within the next three
months, economists and analysts say.

“It’s still a long way to go before Japan pulls out of
deflation. The BOJ has said it will patiently maintain very easy
monetary policy. They really need to do so for a very long time
for the country to escape deflation,” said Takeshi Minami, chief
economist at Norinchukin Research Institute.

“Once the government comes up with a long-term plan for
fiscal discipline in June, the BOJ should increase its long-term
government bond purchases.”
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Graphic on CPI http://link.reuters.com/fup25j
Graphic on BOJ deflation f’cast: http://r.reuters.com/zyv99h
More stories on Japan’s economy [ID:nECONJP]
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The 1.2 percent fall in the core consumer price index, which
includes oil products but excludes volatile food costs, matched a
median market forecast. The pace of drop slowed slightly from
January but retailers remain under pressure to cut prices while
coping with a profit squeeze to woo consumers who are tightening
belts amid falling wages. [JPCPI=ECI]

The decline in core CPI is likely to widen from April when
the government makes public high schools free to put more money
into the hands of households and spur personal spending.

The government said on Friday it would reflect this move in
its CPI calculations from April.

Analysts said they expect this to push down annualised core
CPI by about 0.5 percentage point, adding that they would have to
disregard such technical factors to keep track of actual price
trends.

The core-core inflation index, similar to the core index used
in the United States, fell 1.1 percent from a year earlier, after
record falls of 1.2 percent in January and December.

Japanese government bonds shrugged off the data. Yields on
benchmark 10-year JGBs (JP10YTN=JBTC: ) rose to 1.385 percent, the
highest since mid-November, after a poorly received auction of
seven-year U.S. Treasury notes.

“The pace of decline in prices is slowing somewhat, but
prices are still falling,” Finance Minister Kan told reporters
after the data.

“More efforts will be needed in order to escape deflation.”

Kan also said he wanted to push forward debate on how to use
1 trillion yen ($10.78 billion) in reserves in the budget for the
fiscal year from April 1, which the parliament passed a day
earlier.

Kan stopped short of saying the government plans to launch
extra stimulus, because Japan’s outstanding debt is almost twice
the size of its gross domestic product, leaving little room for
fiscal spending.

Ratings agencies have threatened Japan with a downgrade if it
doesn’t show more fiscal discipline, so the government has been
leaning on the BOJ to support the economy.

The BOJ loosened monetary policy earlier this month by
doubling to 20 trillion yen the amount of loans it offers
commercial banks for three months at 0.1 percent, which is the
benchmark rate. That decision came after Kan and other cabinet
members prodded the BOJ on an almost daily basis. [ID:nSGE62G03I]

The BOJ is virtually alone in easing monetary policy among
major central banks, although other G7 authorities are showing
little inclination to tighten policy either.

The BOJ is likely introduce a similar six-month funding
scheme in the next few months to lower term rates further,
economists say. The central bank’s policy board next meets on
April 6-7, and then on April 30, when it reviews policy and its
economic and price forecasts in a twice-yearly report.

The BOJ expects deflation to last until early 2012, but has
said price falls will ease as the economy recovers and won’t
affect much the public’s long-term price expectations.

Deflation hurts the economy as households hold off spending
on the view that prices will fall further in the future, forcing
companies to cut prices to lure them to spend.

But BOJ policy board member Hidetoshi Kamezaki warned on
Thursday that deflation is starting to affect public perceptions
about future price moves and may make it even more difficult for
Japan to escape from persistent price falls, suggesting the bank
could take additional easing measures. [ID:nTOE62O02M]

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(Editing by Hugh Lawson)

UPDATE 3-Japan deflation grinds on, may pressure BOJ to ease