Friday, February 25, 2005


Nation-wide core inflation fell to 0.3% y/y in January, but deflationary pressures are slowly receding

In January, the core consumer price index (nation-wide), excluding perishables, was down by 0.2%, and fell by 0.3% on a yearly basis, after –0.2% in December. Overall prices declined by 0.4% over the month, down 0.1% on a yearly basis, the fastest pace of decrease since May 2004. The period of deflation is now lasting for almost seven years.

As usual, “special factors” explain price developments in January. The core CPI was depressed by falling prices for phone, electricity and rice. The impact of phone and electricity rate cuts will depress core inflation throughout 2005. Since October 2004, the positive base effect due to soaring rice prices between October 2003 and September 2004 has disappeared and rice prices lowered nation-wide core CPI by more than 0.20 pp. All in all, core inflation is expected to remain below zero in Q1 2005.

In Tokyo, overall prices were steady in February, falling by 0.5% over the year, after –0.2% in January, and core CPI fell 0.5% y/y, with rice prices contributing 0.25 pp to the decline.

However, deflationary pressures are receding very slowly in all sectors except those where deregulation led to intense price competition. In particular, employee’s income growth turned positive in Q4 2004, for the first time since Q2 2003, recording a 0.4% rise. This trend is likely to continue, since the demand for labour is gradually picking up. Finally, due to bottlenecks in some sectors of the economy, higher costs will be progressively passed onto final prices.
Written: by LuisB