Japan’s February inflation slows, coronavirus puts BOJ’s focus on growth

(C) Reuters. Japan’s February inflation slows, coronavirus puts BOJ’s focus on growth

By Kaori Kaneko

TOKYO (Reuters) – Japan’s annual core consumer inflation eased in February as energy prices fell and the coronavirus outbreak clouded the outlook as consumers grow more cautious about spending, adding to fears the economy could be sliding into recession.

The weak data comes days after the Bank of Japan announced a package of emergency easing measures in a bid to stabilise economic activity and financial markets, as the global shock from the pandemic deepens.

For Japanese policymakers and investors, growth risks have eclipsed the usual fretting over stubbornly weak inflation, which is far from the BOJ’s 2% target.

The core consumer price index, which includes oil products but excludes volatile fresh food prices, grew 0.6% in the year to February, data from the Ministry of Internal Affairs and Communications showed on Thursday.

That pace was slower than an 0.8% rise in January and matched economists’ median estimate for a 0.6% rise.

The so-called core-core price index, which excludes food and energy prices and is closely watched by the central bank as a narrower gauge of inflation, rose 0.6% in February.

Excluding the impact of a sales tax hike to 10% from 8% in October and some other policy steps, the core CPI index rose 0.2% in February on-year and the core-core inflation index was up 0.4%. Both slowed from respective rises on 0.4% and 0.6% in January.

Analysts say the blow from the virus outbreak on businesses and consumers has likely tipped the economy into recession, following a deeper than expected contraction in the fourth quarter.

Supply chains, trade and tourism have been severely disrupted as the virus spreads from China to its Asian neighbours and then the rest of the world.

As new orders collapsed, business surveys showed Japan’s February factory activity contracted at the fastest pace since 2016, while a gauge on services slumped to its weakest in nearly six years.

On Monday, the Bank of Japan said it was ramping up purchases of riskier assets and creating a new programme to ease corporate funding strains, joining other major central banks in efforts to prevent a global recession.

But after years of massive stimulus failed to spur inflation, the BOJ has limited ammunition, apart from cutting interest rates deeper into negative territory.

“Monetary policy cannot be the only game in town,” economists said in a BofA Global Research report earlier this week.

“Given the scale of the shock to business activity, incomes, and therefore spending, the government will need to deliver far more aggressive easing actions to stabilize domestic demand and sentiment.”

Japanese Prime Minister Shinzo Abe will form a panel of ministers on Thursday to lay out a package to help the economy weather the hit from the outbreak, the government said on Wednesday.

Japan last week announced a second package of measures worth about $4 billion in spending to cope with the fallout to the economy of the coronavirus outbreak, focusing on support for small and mid-sized firms.