The nation's core consumer prices snapped two straight months of declines in June but risks remain for a prolonged economic slump from the novel coronavirus crisis, which has depressed consumption and raised concerns about a return to deflation.
The core consumer price index (CPI) was flat in June with slower falls in energy prices, helping the gauge out of negative territory. The reading dashed expectations for a third straight month of decline and followed central bank comments last week that the economy would likely shake off the hit from the pandemic.
Japan lifted nationwide state of emergency measures in late May but has seen a renewed spike in infections in Tokyo, stoking fears of a second wave of new cases that could curtail spending in an already weakened economy.
"It is inevitable that the outlook for the wage environment will become severe, as firms could cut bonuses and payments due to significant deterioration in corporate earnings," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"We can't expect a V-shaped economic recovery and a lack of demand, including that from overseas, could become chronic, so downward pressure on prices could strengthen."
The core CPI, which includes oil products but excludes volatile fresh food prices, was flat in June from a year earlier, government data showed Tuesday.
That compared with the median market forecast of a 0.1 percent decline and falls of 0.2 percent reported in both April and May.
The so-called core-core price index, which excludes food and energy prices and is closely tracked by the central bank as a narrower gauge of inflation, grew 0.4 percent in June after the same rate of gain in May.
The latest quarterly forecasts by the Bank of Japan (BOJ) showed consumer prices projected to fall 0.5 percent this fiscal year, which runs to next March, and stay well below its 2 percent target through early 2023.
The economy likely contracted more than 20 percent in the April to June period as the virus hit global growth and the government shut down the economy from April to late May.
The forecasts said recovery in the world's third-largest economy was expected to be modest as the pandemic exacts a heavy toll on exports, business activity and jobs.
Japan has reported over 25,000 infections and more than 1,000 deaths.
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