Return to deflation for Japan in February

TOKYO - JAPAN slipped back into deflation in the same month the Bank of Japan raised interest rates, according to new figures that raise questions about the central bank's haste in tightening monetary policy.

Core consumer prices, which exclude fresh food prices, fell 0.1 per cent in the year to February, the government said yesterday.

Although the return to deflation for the first time in 10 months was widely expected, it still gives ammunition to the many economists who think the bank acted too pre-emptively in raising interest rates before deflation had been killed for good.

The bank raised its benchmark rate to 0.25 per cent in July, and 0.5 per cent last month.

Many economists think Japan's return to deflation will not be a mere blip.

The government also said yesterday that March core consumer price figures for Tokyo unexpectedly fell 0.1 per cent on the year.

Still, financial markets reacted little, partly because the dip had been widely expected.

Central bank governor Toshihiko Fukui told parliament earlier this week that growth in the core consumer price index (CPI) might turn negative because of falling crude oil prices, but that prices were on a long-run upward trend.

The effect of the price data was also mitigated by strong output numbers, which suggest demand in Japan is high and prices could come under upward pressure.

Although industrial production fell 0.2 per cent month on month in February, government forecasts, based on extensive survey work, suggested strong rises in manufacturing output in March and April.