Core consumer prices will rise 0.1% in the 12 months ending March 2008 and 0.5% the following year, the central bank said in Tokyo today in its semi-annual outlook. Policy makers had previously predicted a 0.5% inflation rate this year. Stalling consumer prices will make it harder for the BoJ to raise its 0.5% overnight lending rate to prevent excessive business investment. The cheapest official borrowing cost among major economies has driven the yen to a record low against the euro and high-yielding currencies.
Consumer price data damped any speculation the BoJ will bring forward an interest-rate increase, said Koji Fukaya, senior currency strategist in Tokyo at Deutsche Securities, adding that rates will be on hold until August. Thats a bad development for the yen.
Core consumer prices, which exclude fresh food, declined 0.3% in March from a year earlier, the government statistics bureau said on Friday, the second straight monthly drop. Other government reports today showed factory output unexpectedly slumped 0.6%, retail sales declined for a sixth month, this time by 0.7%, and household spending rose a less-than-expected 0.1%.