Japanese consumer prices rose less than expected in December, adding to doubts about the Bank of Japan's ability to raise interest rates next month and sending the yen lower and bond futures to a one-month high.
Economists blamed weakness in personal demand amid slow gains in wages for the sluggish price rises despite the long expansion currently enjoyed by the world's second largest economy.
Japan's core consumer price index (CPI), which excludes volatile fresh food prices, rose 0.1 percent in December from a year earlier, government data showed on Friday, less than economists' consensus forecast for a 0.2 percent rise. Core CPI in the Tokyo area, which is announced a month before nation-wide figures, rose 0.2 percent in January from a year ago, matching the consensus forecast.
"Today's data will raise the hurdle for a rate hike in February," said Kiichi Murashima, an economist at Nikko Citigroup. "Even though the BOJ talks about a forward-looking approach in how they conduct monetary policy, these figures will make it hard to justify a near-term rate hike," he said. The yen slipped to 121.58 yen per dollar from 121.45 yen just before the data, while Japanese government bond futures were up 0.23 point at 134.93, rising above 134.86 for the first time since late December.
For calendar 2006, nation-wide core CPI rose 0.1 percent, the first clear rise since 1998. The BOJ kept rates on hold at a board meeting last week, saying it was prudent to wait for more data given mixed economic indicators, even though financial markets had briefly priced in a rate hike prior to the meeting.
Finance Minister Koji Omi, meanwhile, pointed to the merit of slow growth in prices. "Some people seem to think prices should rise. But the economy is growing smoothly and I don't necessarily think it's better to have prices rising," he said.
He reiterated that monetary policy is up to the central bank. Chief Cabinet Secretary Yasuhisa Shiozaki said there was no change in the government's view that the end of deflation is in sight, regardless of the CPI figure.
The central bank has cited softness in consumption and consumer prices since the middle of last year as among reasons it should wait to raise rates. Although Japan's economy is in the longest period of expansion of the post-war era, growth rates have been sluggish, restrained by a lacklustre rise in personal consumption.
"Despite talk of the tightening job market as baby-boomers retire, firms are still able to hire new employees without raising wages," said Seiji Adachi, senior economist at Deutsche Securities.
He said the jobless rate will probably need to fall to below 3.5 percent or so to trigger a significant rise in demand. In November, the jobless rate in Japan declined to 4.0 percent from 4.1 percent in the previous month. Many economists think growth in consumer prices will remain subdued in the coming months due to recent falls in oil prices and a slow pace of growth in wages.
Some think core CPI may even post year-on-year falls in the months ahead as it loses support from crude oil prices, which fell to 20-month lows earlier this month.
Excluding food and energy prices, consumer prices fell 0.3 percent in December from a year earlier, reinforcing doubts about a February rate hike. Some analysts said it depended on how central bankers would interpret the numbers.
"The point is whether the BOJ should consider the current weakness in core CPI growth as a temporary factor and attach greater importance to the future outlook by analysing other data," said Masaaki Kanno, chief economist at J.P. Morgan.