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Japan July inflation stagnates, lacks demand-driven support

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By Reuters
Japan July inflation stagnates, lacks demand-driven support
A woman walks outside a shop in a shopping district in Tokyo, Japan, September 29, 2016. REUTERS/Toru Hanai/File Photo   -   Copyright  Toru Hanai(Reuters)

By Leika Kihara

TOKYO (Reuters) – Japan’s core consumer prices rose 0.8 percent in July from a year earlier, unchanged from the previous month’s gain, adding to evidence the central bank is making little headway in achieving its elusive 2 percent price target.

Subdued wage and price growth have forced the BOJ to extend its massive stimulus program despite the rising risks of the policy, such as the hit to bank profits from near-zero rates.

The BOJ last month conceded that inflation will miss its elusive 2 percent target until early 2021 and took steps to make its policy framework more sustainable.

The rise in the nationwide core consumer price index (CPI), which includes oil prices but excludes volatile fresh food prices, fell slightly short of a median market forecast for a 0.9 percent gain.

The so-called core-core inflation index, a more closely watched gauge the BOJ uses to strip away the effect of both energy and fresh food costs, was up 0.3 percent year-on-year in July after rising 0.2 percent in June, government data showed on Friday.

The data underscores the challenge the central bank faces in eradicating an entrenched deflationary mindset that discourages firms from raising prices for fear of scaring away cost-sensitive consumers.

Wage growth remains key. While intensifying labour shortages force companies to hike hourly pay for temporary workers, they remain reluctant to raise permanent workers’ salaries for fear of incurring higher fixed costs.

Japan’s economy rebounded in the second quarter from a contraction in the first three months of this year thanks to robust household and business spending.

Real wages rose at their fastest pace in more than 21 years in June, thanks mostly to higher bonus payments, offering policymakers some hope that consumption will gain momentum and encourage firms to raise prices.

(Reporting by Leika Kihara; Editing by Eric Meijer)