Japanese consumer prices fell slightly more than expected in May and June, data showed on Friday, a reminder that deflation isn't over even as the economy recovers and spelling no end to the central bank's loose monetary policy.
Expectations that consumer prices, which the Bank of Japan uses as a criterion for its current policy framework, would improve had fanned speculation of an early end to the BoJ's hyper-loose policy.
But the core Tokyo-area consumer price index (CPI) for June, a leading indicator for nation-wide prices, was down 0.1 percent from the same month a year earlier, falling short of a consensus market forecast that it would be flat.
"The solid economic growth rate is narrowing the supply/demand gap and these CPI figures do not change our view that prices are bottoming out," said Toru Sakane, an economist at BNP Paribas.
"Having said that, prices won't start rising so easily. After July, the effect of last year's tobacco tax rise will fade out, and the rise in oil prices does not have that great an impact on overall prices."
The nation-wide CPI was down 0.3 percent in May from a year earlier, compared with economists' average forecast of a 0.2 percent decline.
BoJ Governor Toshihiko Fukui said it would likely take a long time before conditions for ending the "quantitative easing" policy were met, and it was too early to discuss an exit policy.
"To reiterate what I have been repeatedly saying, it's much too early to talk about it," he told a news conference after the BoJ's Policy Board voted unanimously to keep policy unchanged on Friday.
The price data poured cold water on expectations of inflation, sending bond yields lower. The yield on the 10-year government bond plummeted seven basis points to 1.835 percent by late Friday trade.
Fukui added that the results of the upcoming "tankan" survey of corporate sentiment would not influence the BoJ's view on the economy.
"I don't know what the results will be, but I think they will underscore our view that the economy continues to recover," he said.
A Reuters poll of 24 economists on the June tankan survey produced a median forecast of plus 17 for the diffusion index (DI) for large manufacturers. If realised, that would be the highest level since August 1991.
The tankan survey will be released on July 1.
Last October, the BoJ strengthened its commitment to its current policy, offering three criteria that had to be met before the policy would end.
The three are core nation-wide CPI would have to rise stably above zero, the majority of the nine-member Board believe it would stay above zero for an extended time and ending the policy was in line with the BoJ's view of the economy.
"We believe it will take a long time before the three critera are met, and in that process, we want to remove any market speculation that would shorten the time-commitment effect," Fukui said.
By pledging to keep flooding the markets with liquidity over time, the BoJ aims to defuse inflationary expectations across the yield curve.
Analysts had forecast that Tokyo prices in June could be unchanged from the same month a year earlier due in part to rising gasoline prices.
For June Tokyo-area CPI, costs related to automobiles - namely gasoline - rose 1.0 percent, reflecting the impact of rising crude oil prices.
Regular gasoline prices rose 5.8 percent from a month earlier, while prices of premium gasoline gained 5.6 percent from May, a government official said.
While the CPI could briefly interrupt its decline in the coming months, economists say such a rise is unlikely to be sustainable.
Gasoline prices may be rising, but they are likely to be offset as other sectors still find it difficult to pass on costs to the final consumer, said Shuji Shirota, an economist at Dresdner Kleinwort Wasserstein.