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Deflation off slightly last month: data

AFP-JIJI

Consumer prices rose 1.2 percent last month, the fastest pace in five years, edging closer to the Bank of Japan’s 2.0 percent target in its war on deflation as Tokyo battles to reverse years of falling prices.

But if volatile food and energy, by far the strongest drivers of the recent increases, are stripped out of the index, so-called core-core prices only rose 0.6 percent, which would be the biggest uptick since August 1998.

The core consumer price index, favored by the government, measures a basket of everyday goods but only excludes the cost of fresh food when gauging the nation’s basic trend in prices.

Japan’s energy expenses have spiked since March 2011.

Prime Minister Shinzo Abe’s government initially made conquering deflation and stoking growth in the world’s third-largest economy priority when it launched its “Abenomics” economic policy blitz.

The upbeat headline for Friday’s inflation data, however, was tempered by the fact that the prices being measured by the core CPI are still largely driven by higher energy bills, rather than surging demand for the everyday goods that power the economy as a whole.

Electricity bills jumped a hefty 8.2 percent, the data showed, as energy costs continue to soar due to the Fukushima disaster, which forced the nation’s reactors to be idled.

Japan has been importing fossil fuels to plug the energy gap, a pricey option that has become even more expensive ever since the Bank of Japan’s unprecedented Abenomics-inspired easing drive sharply weakened the yen.

Friday’s data showed prices generally moving toward the BOJ’s ambitious 2.0 percent inflation target, which is to be reached in just two years.

While deflation may sound like a good thing for shoppers, it can be bad for growth because falling prices encourage consumers to put off spending, knowing they will pay less for a product if they wait. That makes it difficult for companies to invest and discourages them from hiking wages, which, in turn, reduces consumer spending further.

Despite Abe’s much-lauded start since his party swept a national election a year ago, analysts have been warning that Tokyo’s bold pro-growth program — a mix of usual big government spending and radical monetary easing — is not enough to cure the economy without his promised structural economic reforms.

And getting Japan’s notoriously thrifty households to spend more is a key part of Abe’s campaign, along with the yet-to-be-seen wage hikes.

That was in evidence Friday with separate data showing that household spending inched up 0.2 percent in November, well below market expectations, as consumers brace for the first stage of the doubling of the sales tax next year.

Factory output, meanwhile, expanded by a weaker-than-expected 0.1 percent in November, while the unemployment rate held steady at 4.0 percent.

Last week, the BOJ held off fresh policy measures to stimulate growth.