Japan’s core consumer prices fell in October at the fastest annual pace in nearly a decade as the boost from last year’s sales tax rise petered out, heightening concerns of a return to deflation as the country battles record cases of COVID-19.
Analysts expected consumer prices to continue falling in the coming months due to sluggish consumption, casting doubt on the central bank’s view Japan will eventually see prices bounce back towards its elusive 2 percent inflation target.
A resurgence in coronavirus infections also clouds the outlook, as it may hurt consumption and dent the boost to growth from the government’s stimulus measures, they said.
“Even when stripping away one-off factors, the trend of consumer prices is weak,” Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute, told Reuters News Agency.
“If restrictions on dining and travel are reimposed, that could derail Japan’s fragile economic recovery,” he said.
Core consumer prices, which exclude volatile fresh food costs, fell 0.7 percent in October from a year earlier, government data showed on Friday, matching a median market forecast.
It was the third straight month of declines and the biggest year-on-year drop since March 2011, according to the data.
The decline was largely a result of the high base effect of a boost to inflation last year, following a sales tax increase to 10 percent from 8 percent, as well as a more recent government discount campaign for domestic travel aimed at reviving tourism.
Energy costs also fell, weighing on overall prices, the data showed.
Some analysts said core consumer prices may suffer annual declines of about 1 percent in coming months, which could stoke fears of deflation and encourage households to put off spending.
Japan’s economy grew at the fastest pace on record in the third quarter, rebounding sharply from its biggest post-war slump, as exports and consumption recovered from the devastating damage caused by the pandemic.
But analysts expected growth to slow again amid a resurgence in infections not only worldwide but also in Japan. Authorities in Tokyo, home to some 14 million people, raised the city’s alert level for the virus to the highest on the scale on Thursday.
Prime Minister Yoshihide Suga has instructed his cabinet to compile a fresh stimulus package, although the renewed rise in infections could affect the fate of government campaigns encouraging households to travel and dine at restaurants.