September 25, 2015 2:36 am

Japan has fallen back into deflation for the first time since April 2013 in a symbolic blow to prime minister Shinzo Abe’s economic stimulus.

Headline prices, excluding fresh food, were down by 0.1 per cent compared with a year ago in August, as slumping global energy prices outweighed stronger domestic inflation in Japan.

The figures create a conundrum for the Bank of Japan: while it is encouraged by signs of inflation at home, the fall in headline prices risks creating the impression its policy has failed, especially given sluggish economic growth.

That is leading to rising pressure on the BoJ to ease monetary policy further when it updates its economic forecasts at the end of October.

“Given that the headline inflation rate turned negative again and that the growth outlook has become gloomier, we stick to our view that the BoJ is likely to decide on additional easing by the year-end, most likely at the end of October,” said Hiromichi Shirakawa and Takashi Shiono at Credit Suisse.

However, core prices excluding food and energy were up by 0.8 per cent on a year ago, a level seldom seen since the 1990s. That suggests the domestic economy is running out of spare capacity, creating pressure for higher prices.

“Not surprisingly, energy prices continue to weigh on headline and core inflation in Japan, but the Bank of Japan would take comfort from further signs that domestically driven inflation is rising,” said Michael Moen, an investment manager at Aberdeen Asset Management.

“Once you exclude food and energy, inflation is actually rising very gradually as prices for services continue to increase. Against this backdrop it’s unlikely that we will see an increase in the QE programme anytime soon.”

Haruhiko Kuroda, the governor of the BoJ, has taken to highlighting the spread of domestic price rises as a sign his policy is working. “If you look at goods used every day or week like food and household products, the proportion with rising prices was higher after April in particular,” said Mr Kuroda at a recent press conference.

He has continued to insist Japan can reach 2 per cent inflation by the middle of fiscal year 2016 even though most analysts think that goal is n