Japan sees no end to deflationary pressure

Japan said Friday its consumer prices fell for a fifth straight month in June despite rising energy costs as deflationary pressure kept weighing on the world's second-largest economy.

But the drop came within market expectations and analysts predicted it would not be enough to deter the Bank of Japan from moving soon to lift the nation's super-low interest rates.

Core consumer prices -- which exclude volatile prices of fresh food -- dipped by 0.1 percent last month compared with a year earlier as high-tech goods got cheaper, the Ministry of Internal Affairs and Communications said.

The core consumer price index (CPI) for Tokyo alone in July -- seen as a leading indicator for national price trends -- was also down 0.1 percent, the ministry said.

Japan has hesitated at declaring an official end to its nearly decade-long battle with falling prices, which hurt the economy by discouraging investment and consumption.

Prices of oil products -- which helped boost inflation figures into positive territory until February -- rose for the first time in five months in June, going up 1.4 percent.

Energy prices rose 0.9 percent in June following a 0.1 percent gain the previous month but were offset by lower prices for personal computers and digital consumer products such as flat screen televisions.

Excluding energy, Japan's core consumer prices were down 0.4 percent in June, the ministry said.

"Prices are expected to continue falling for another few months," said Keiji Kanda, an economist at Daiwa Institute of Research.

"But the figures are likely to come into positive territory sometime after this autumn as domestic demand remains firm in the long run," Kanda said.

"Therefore, I would say the chances of the Bank of Japan raising interest rate in August are still high."

Renewed concerns over deflation have created a headache for the central bank, which last July raised interest rates for the first time in almost six years, followed by another quarter-point hike to 0.5 percent in February.

The Bank of Japan has vowed to continue raising interest rates, albeit gradually, as borrowing costs here are far below other major world economies.

Bank of Japan governor Toshihiko Fukui has repeatedly warned about the dangers of a very loose monetary policy, which encourages so-called "carry traders" to borrow here and invest in higher-yielding markets.

But the central bank, which holds its next policy board meeting on August 22-23, also may face political uncertainty. Japan holds elections on Sunday in which voters are expected to rebuke Prime Minister Shinzo Abe.

The equities market also saw turbulence Friday, with the Tokyo Stock Exchange's benchmark index sliding more than two percent on woes in the US housing market.

Separately, Japan said Friday that retail sales shrank 0.4 percent in June from a year earlier to 10.95 trillion yen (92 billion dollars), the first decline in two months.

The fall was mainly due to a slump in sales of automobiles, machinery equipment as well as food and beverages, offsetting gains in fuel, cosmetics and pharmaceuticals, the economy, trade and industry ministry said.

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