Japan remains in deflation in June, official data shows

Japan remained in deflation in June as the central bank boosted stimulus measures on Friday.

The consumer price index fell 0.4% year-on-year in June, flat on the previous month and in line with expectations.

Core CPI, which strips out fresh food, worsened to a 0.5% year-on-year decline from a 0.4% contraction in May. Economists had predicted it would remain unchanged.

It marked the biggest fall in core CPI since March 2013, despite the Bank of Japan’s efforts to move inflation towards its 2% target with quantitative easing and negative interest rates.

The so-called core-core reading, which excludes both food and energy prices, rose 0.4% year-on-year in June, slowing from a 0.6% increase in May’s and missing forecasts for a 0.5% gain.

At the same time, the BoJ kept interest rates unchanged at -0.1% on Friday but said it will increase purchases of exchange-traded funds. The BoJ voted 7-2 to leave rates on hold, but said it will up its ETF purchases to an annual pace of Y6trn from Y3.3trn and double the size of its lending programme for local companies to $24bn.

The Bank also established a new facility for lending securities to be pledged as collateral for the US dollar funds-supplying operations.

The BoJ had cut its rate to below zero in a surprise move back in January.

The Bank said in a statement that the measures were to prevent uncertainties such as the Brexit vote and the slowdown in emerging economies from denting business confidence and consumer sentiment and to “ensure smooth funding in foreign currencies by Japanese firms and financial institutions".

The ETF purchase increase was expected by the market but the inclusion of no other key measures, such as additional Japanese government bond purchases, a rate cut or negative rate loan support program, was seen as a disappointment by some analysts.

“Of course, with Japanese June CPI today coming in at -0.4% y-o-y headline and just 0.4% core, and inflation-adjusted household spending collapsing 2.2% y-o-y versus an expected -0.4%, it’s abundantly clear the BoJ is failing badly,” said Rabobank.

“Near-term that means disappointment today will push JPY higher again, and equities lower; and longer term it still means that Abe and Kuroda will have to go The Full Monty together – but today they will most probably leave their hats on.”