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[TOKYO] After hovering near zero for months, the Bank of Japan's main inflation gauge dropped into negative territory as weak domestic demand and plunging oil prices wiped out the impact of Governor Haruhiko Kuroda's unprecedented monetary stimulus.
Consumer prices excluding fresh food fell 0.1 per cent in August from a year earlier, the first decline since April 2013, the same month Mr Kuroda embarked on a campaign of record asset purchases to rid Japan of its "deflationary mindset." Economists had expected prices to slide 0.1 per cent.
This latest price data underscore mounting challenges to the reflation campaign led by Mr Kuroda and Prime Minister Shinzo Abe, with the economy contracting last quarter amid disappointing household spending, industrial production and business investment. October is shaping up as key a month for the BOJ, with almost one-third of economists surveyed by Bloomberg forecasting the central bank will add to its stimulus when it updates its estimates for growth and inflation.
"The drop in prices brings more unpleasant news for the BOJ," Masamichi Adachi, an economist at JPMorgan Chase & Co and former BOJ official, said before Friday's report by the statistics bureau. "It's getting harder to defend keeping policy unchanged." Consumer prices excluding food and energy rose 0.8 per cent in August, the report showed.
Mr Kuroda has said the bank won't hesitate to adjust policy if there is a danger of prices not rising to the target, while also indicating that the BOJ will look past any temporary drop caused by the oil market. The BOJ expects inflation to reach its goal around the six months through September 2016, he said earlier this month when the banks' board policy was left unchanged. Deputy Economy Minister Yasutoshi Nishimura offered a different view this week, suggesting that hitting the target may be delayed as China's economic slowdown affects the price of oil and other natural resources.
The market also has another perspective. The break-even rate, which looks at the difference in yields between regular bonds and inflation-linked debt, points to prices rising an average of 0.84 per cent annually over the next 10 years, down from about 1.1 per cent in May.
The yen fell 0.1 per cent to 120.24 per dollar at 8:35 am in Tokyo. It's slumped 23 per cent since Mr Kuroda launched his stimulus in April 2013.
No economist in the Bloomberg survey expects price gains to reach the target in the central bank's stated time frame.
Some BOJ officials see a growing likelihood the central bank will lower its inflation outlook and push back the schedule for reaching 2 per cent because of the fall in oil prices, people familiar with the discussions said earlier this month.