• Bloomberg, Reuters

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As the nation’s economy continued to reopen, amid weak global oil prices and a rise in domestic virus infections that could damp activity going forward, its key inflation gauge stayed at zero for a second month.

A slow economic recovery from last quarter’s record slump is expected to weigh on prices with consumer demand having collapsed amid resurgent infections, which will in turn hit profits, jobs and business investment, analysts say.

The specter of a return to deflation is likely to keep the Bank of Japan under pressure to continue massive monetary stimulus and maintain ultra-low interest rates, to support government fiscal spending aimed at battling the health crisis.

Consumer prices excluding fresh food were unchanged in July from a year earlier, the ministry of internal affairs reported Friday. Energy continued to weigh on the index, while higher costs for housing and overseas travel packages pushed upward. Economists had forecast an overall gain of 0.1 percent.

Analysts said they expected inflation to continue to hover around zero for the time being amid weak oil costs, counterbalanced by a feeling among businesses that fearful shoppers are unlikely to respond to discounts amid the pandemic.

“Taken together, core CPI is likely to stay largely flat towards next year,” said Yasunari Ueno, chief market economist at Mizuho Securities.

“Japan is in a deflationary situation,” he said, adding that as the nation shifts towards a ‘new normal’ following the novel coronavirus, the BOJ’s 2 percent inflation target was starting to drift from reach.

A recent surge in virus cases has made people more reluctant to venture out and could undermine the recovery, but businesses may not see price cuts as an effective way to get people back into shops, even if sales are weak.

The Bank of Japan has also suggested inflation is now less of priority than making sure that credit flows to businesses.

Last month the bank projected consumer prices would fall an average of 0.5 percent this fiscal year, but governor Haruhiko Kuroda has said repeatedly he still views the risk of the nation falling back into deflation as low at this point.

“The bank’s policy focus is not prices for now,” said economist Masaki Kuwahara at Nomura Securities. He added that prices were holding up as people bought furniture and computers to spend more time at home and work remotely, while lower oil costs compared with last year would start to push down utility prices in coming months. The index was supported in July by higher prices of overseas travel packages, but analysts cautioned that was likely to be misleading because very few people were actually taking trips.

The price of overseas travel packages rose 1.3 percent compared with the prior year, according to the data. Inflation excluding energy and fresh food rose 0.4 percent.

Friday’s data came after a batch of indicators confirmed weak demand at home and abroad, with exports posting a fifth consecutive month of double-digit falls and a surprise drop in core machinery orders pointing to fragile capital expenditure.

Japan’s economy, the world’s third-largest, suffered a record annualized contraction of 27.8 percent in the April to June period as lockdowns through late May aimed at containing the pandemic dampened business activity and crushed private consumption.

Analysts expect any rebound in the current quarter to be modest, with fears of a second wave of infections potentially hitting spending and prolonging a long stretch of deflation.

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