Japanese deflation persists

Japanese consumer prices meandered marginally below year-ago levels in July, as expected, supporting a view in financial markets that the economy will soon emerge from seven years of deflation, though it is not quite there yet.
The core nation-wide consumer price index (CPI), which excludes volatile fresh food prices, was down 0.2 percent from a year earlier, government data showed on Friday.
That matched economists' consensus forecast and was the same size as the previous month's drop. On a seasonally adjusted basis, the core CPI was flat from June.
Economists expect the year-on-year change in CPI to move into positive territory later this year, nudging the Bank of Japan towards ending its ultra-easy monetary policy, called quantitative easing, possibly as early as next year.
"There is no consensus yet on how the Bank of Japan may end its quantitative policy, and it is difficult to say when that might happen," said Yuichiro Noda, an economist at Okasan Economic Research Institute.
"But there's a good chance that the core CPI will turn up in the final quarter of this year."
The BOJ has pledged to maintain its four-year-old easing policy, in which it floods the banking system with excess liquidity, until the core CPI begins to rise steadily and its policy board is convinced deflation will not return.
Finance Minister Sadakazu Tanigaki said after the release of the CPI data that it was too early to talk of an end to the central bank's ultra-loose monetary policy.
"Mild deflation still continues. We are still at the stage where monetary policy should remain committed to overcoming deflation," Tanigaki told a news conference.
Deflation, or a sustained fall in prices, has plagued the world's second-largest economy for more than seven years. But the pace of declines in consumer prices has slowed until the change in core CPI is now hovering just below zero percent.
Expectations that prices would remain subdued even if deflation were to end soon have kept Japanese government bond (JGB) yields remarkably low.
Friday's data "does not change the view that mild deflation is continuing while the broader economy is headed for recovery", Economics Minister Heizo Takenaka told reporters.
Core CPI was flat year-on-year in May but has since continued to clock small declines, due in part to falls in the price of rice and lower telecoms and utilities costs due to deregulation.
Downward pressure from declines in prices of those items is expected to ease in the coming months, when measured on a year-on-year basis, because the prices initially fell late last year and early this year.
"A lot of upward pricing pressure will be accumulated in October-December and January-March," said Takuji Aida, chief economist at Barclays Capital.