Japan: Rising food prices on contamination fears

EcoFlash

Consumer price inflation rose to -0.2% in December, 0.3 point higher than in the previous month. This was mainly due to higher food prices. Core inflation was virtually unchanged. We expect core inflation to remain in negative territory in 2012 and 2013. The major upward risks for prices are related to prices for commodities and electricity.

In December, consumer prices fell by 0.2% from a year earlier. This was 0.3 pp higher than in November. This increase can be largely explained by a sharp increase in rice prices, owing to fears of radioactive contamination. Excluding fresh food (core inflation), the Bank of Japan’s favoured measure, inflation was, at 0.1%, virtually unchanged from the previous month.
Excluding food and energy, inflation was unchanged, at -1.1%. For the 36th consecutive month this indicator was in negative territory. It underlines once more the problems of the economy to get out of deflation. The decline was led by prices for flat-screens, which fell again following weak sales.
In Tokyo, the fall in the general price level continued to ease in January. However, this was again due to rising food prices. The other main inflation indicators were virtually unchanged from December: Excluding fresh products -0.4% and excluding food and energy -1.1%.
We expect core inflation to remain in negative territory in 2012 and 2013. According to this scenario, interest rates should remain close to zero at least until the end of 2013. This is much weaker than projected by the Bank of Japan. It expects core prices to rise by about 0.5% in fiscal year 2013, which could open the way for monetary tightening.
The price outlook is very uncertain. The major uncertainties concern prices for primary commodities and electricity. The former could rise faster than currently assumed. This would be the case if the world economy is recovering more rapidly from the current slowdown. Another factor is electricity prices, which could rise more quickly than currently assumed owing to compensation payments related to the nuclear disaster in Fukushima. The major downside risk is that the current downward trend in prices gets anchored in price expectations.

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Published On Fri, Jan 27 2012, 10:04 GMT

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