Japan's core consumer prices fell 0.7% in October from a year ago, marking the sharpest decline in over nine years, weighed down by a domestic tourism-boosting subsidy program and weak energy prices amid the coronavirus pandemic, government data showed Friday.
The decline in the core consumer price index also came as it lost momentum in year-on-year terms, over the past year driven by a sales tax hike from 8% to 10% implemented in October 2019, according to the Internal Affairs and Communications Ministry.
The core CPI — excluding volatile fresh food prices — dropped for the third straight month and economists expect prices to remain weak, reviving fears of the country slipping back into deflation despite the Bank of Japan's massive monetary easing program.
The index last marked a 0.7% slip in March 2011, when a massive quake and tsunami struck northeastern Japan.
"The fall looks big because of the Go To Travel campaign and the petering out of the tax hike impact," said Yasunari Ueno, chief market economist at Mizuho Securities Co., adding that the underlying trend for the CPI is weak.
The government may be in a dilemma because the discount campaign is aimed at reviving demand and the economy but it negatively affects prices, according to Ueno.
The program, launched in July to partially subsidize Japan residents' domestic travel expenses, has been a drag on CPI in recent months.
Starting in October, the tourism-boosting program was expanded to cover trips to and from Tokyo, the only place that had been excluded due to its relatively high number of coronavirus infections.
Accommodation fees plummeted 37.1% from a year ago, following a 30.0% slump in September.
Last month, the BOJ lowered its CPI forecast for fiscal 2020, projecting a 0.6% year-on-year fall, far from the bank's 2% target. Gov. Haruhiko Kuroda has dismissed the idea of the travel initiative affecting overall price trends, saying its impact is limited to certain sectors.
"When policy support is mainly aimed at preventing the economy from collapse, demand remains subdued and the CPI is expected to be in negative territory for a while," Ueno said.
Despite the lingering effect of the pandemic, Japan's economy rebounded in the three months to September from its worst contraction in the April-June quarter when activity was depressed by a state of emergency over the virus outbreak.
Crude oil prices were pushed down in October as the virus outbreak has raised concerns about economic growth. Kerosene prices sank 13.6% and those of gasoline 9.2%, according to the internal affairs ministry data.
"Energy prices may recover but the Go To campaign will be in place for a while. So we will carefully watch how prices will move overall," a government official said.
The travel subsidy program is scheduled to end in January, but the government is considering extending it.
So-called core-core consumer prices, which exclude fresh food and energy items, shed 0.2% from a year earlier, the first decline in two months.
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