No Sign That Deflationary Pressure Is Abating In Japan: BNP Paribas

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There is no indication that deflationary pressure might be starting to abate in Japan, BNP Paribas said, citing the latest consumer prices data.

Official data revealed on Friday that the nationwide core CPI fell 1.7% year-on-year in November after a 2.2% drop in October. Thus, the pace of contraction slowed in each of the past three months after reaching 2.4% in August. The main factor was a deceleration in deflation for petroleum products.

"Prices of petroleum products have actually fallen over the past two months, but diminished base-year effects associated with a sharp rise through August 2008 followed by a sudden retrenchment mean that the pace of year-on-year decline has actually slowed," BNP Paribas economist Azusa Kato explained. The proportion of CPI components showing price rises from a year earlier dropped to 27.2% in November from 28.3% in October, while more than 60% of constituent goods and services showed year-on-year price declines, the economist noted.

In fact, Tokyo CPI data for December were indicative of a slight acceleration in deflation, according to BNP Paribas. The core CPI inflation rate was unchanged from November at minus 1.9%. Trend-sensitive indicators signal further price falls, Kato said. Only 23.2% of CPI components showed year-on-year price increases, while the proportion showing prices down from a year earlier rose from 57.7% in November to 60.2% in December.

Citing the Tokyo data, Kato reckoned that the nationwide core CPI is likely to fall 1.4% in December after adjusting for differences in consumer spending patterns. The core CPI deflation rate will probably continue to decline over the next couple of months due to the technical "rise" in petroleum product prices, the economist said. BNP Paribas continues to expect the core CPI deflation rate to remain above 1% from February onwards even as base-year effects disappear altogether.

"We are anticipating a mild "soft patch" in the first half of FY2010 as stimulus effects drop away, and we therefore see very little prospect of deflationary pressure diminishing to any significant extent in the near future," said Kato. Considering Hatoyama government's recently announced tax measures, BNP Paribas upwardly revised its core CPI inflation forecasts for FY2010 and FY2011 by 0.1 point each.

"We are forecasting a core CPI inflation rate of -1.7% for FY2009, -1.2% for FY2010 and -0.4% for FY2011," the economist said. "Our calendar-year forecasts are for a core CPI inflation rate of -1.3% in 2009, -1.4% in 2010, and -0.4% in 2011."

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