— Adds Economist Comments, Details Throughout
— Japan Jan Core CPI -0.2% Y/Y, 23rd Drop In Row; Dec -0.4%
— Japan Jan Core CPI Drop Smallest Since -0.1% in April 2009
— Japan Jan Core CPI MNI Survey Median Forecast: -0.3% Y/Y
— Central Tokyo Feb Core CPI -0.4% Y/Y, 22nd Drop; Jan -0.2%
— Japan CPI Shows Jan Energy Costs +4.7% Y/Y Vs Dec +4.0%

TOKYO (MNI) – Japan’s national core consumer prices posted the
smallest annual decline in 21 months in January thanks to rising energy
costs, showing the economy is gradually moving out of years of
deflation, data released Friday by the Ministry of Internal Affairs and
Communications showed on Friday.

The nationwide core CPI (excluding perishables) fell 0.2% in
January from a year earlier, posting the 23rd straight y/y drop, but the
pace of decline decelerated further from -0.4% in December, due also to
the tobacco tax hike that took effect on Oct. 1.

The January reading was the smallest since April 2009, when the
core CPI dipped 0.1% y/y.

The core CPI, which excludes fresh food but includes energy, showed
a smaller-than-expected drop in January, compared the median forecast of
-0.3% by economists polled by Market News International.

“As the impact of school tuition cuts will wane fully in March and
food and energy prices are rising, the core CPI is most likely to post a
year-on-year rise in April,” said Tatsushi Shikano, senior economist at
Mitsubishi UFJ Morgan Stanley Securities.

Overall energy costs in January rose 4.7% following a gain of 4.0%
in December.

Prices of refined petroleum products rose 8.5% in January, up from
+5.8% in December but slower than +12.3% seen in June 2010.

The y/y rise in gasoline prices was faster at +8.2% in January than
+5.5% in December, while the pace of increase in heating oil
accelerating to +18.4% in January from +13.1% in December.

The average price of regular gasoline in Japan rose to Y138.1
($1.67) per liter, or $6.35 per gallon, this week from Y138.0 last week,
data released by the Oil Information Center showed Wednesday.

The increase comes after last week’s data showed the first fall in
11 weeks.

The average price this week was up 7.2% from Y128.8 per liter seen
a year earlier.

Retail gasoline prices were on a general upward trend from
mid-January 2009 until May 31, 2010, when they began to ease prior to
the recent pickup through Feb. 7, 2011.

Deflation is expected to ease further in the coming months.

The Ministry of Agriculture, Forestry and Fisheries has said it
will raise prices of grain for domestic flour millers by an average of
18% to Y56,710 per ton, effective on April 1, marking the biggest
increase since 2008.

In Japan, the government, which alone has authority to import wheat
and sell it to flour millers, sets prices twice annually, in April and
October, based on its preceding half-year purchase prices.

When bad weather hit international grain prices in 2007 and 2008,
Japan’s average domestic wheat price soared as high as Y76,030 a ton in
October 2008, pushing up costs for bakeries and restaurants.

The private sector is also scurrying to pass on rising production
and transportation costs to retail prices. The price tag of more than
60% of products sold at the nation’s supermarket stores rose between
October and January, according to a recent survey by the Nikkei business
daily.

“As a whole, the CPI data confirmed an easing of the deflationary
pressure,” said Yoshiro Sato, economist at Credit Agricole Securities
Asia B.V.

The drop in January was led by markdowns in durable goods such as
consumer electronics and continued drops in high school tuition after
the government began providing subsidies last April.

School tuition costs fell 17.4% in January from a year before,
contributing -0.49 percentage point to the total CPI. The government
began subsidizing high school education in April 2010.

The Bank of Japan has said high school tuition cuts, whose effect
on CPI will last for 12 months from last April, should be excluded when
gauging the consumer price trend.

Meantime, total national CPI was flat in January from a year
earlier after being unchanged in December and rising 0.1% in November.
In October, the index was up 0.2%, marking the first y/y rise since
December 2008.

On a month-over-month basis, the core national CPI was down 0.4% in
January after being flat in December.

Central Tokyo core CPI fell 0.4% year-on-year in February, the 22nd
straight y/yr drop.

The pace of decline accelerated from -0.2% in January due largely
to lower rents and the lingering effect of government subsidies for high
school education.

Tokyo-area energy costs in the area rose 1.4% in February, with the
pace of growth slowing from +2.8% y/y in January.

In central Tokyo, gasoline and heating oil prices continued to rise
from year-earlier levels, albeit at a slower pace than in the previous
month. Gasoline rose 6.1% in February after +8.4% in January while
kerosene was up 11.3% this month vs. +13.1% in January.

Month-on-month, core central Tokyo CPI slumped 0.1% in February
following a 0.6% drop in January.

Meantime, national CPI excluding food and energy, or the U.S. style
core CPI, fell 0.6% from a year before in February, posting the 25
consecutive month of price falls following -0.7% in January.

Tokyo CPI excluding food and energy fell 0.3% in February from a
year earlier following -0.3% in January. It stayed in negative territory
for the 26th straight month.

CPI figures date to 1970 under the current 2005 base year.

Looking ahead, economists warned of downside risks stemming from
unrest in the Middle East and northern Africa.

“If crude oil price were to surge beyond $110 a barrel and stay
above that level, it might fully offset an expected 0.5 percentage point
negative contribution from the planned revision to the CPI data,”
Mitsubishi UFJ’s Shikano said.

“But if commodity prices keep rising based on tight supply rather
than on strong growth of the global economy, it may increase downside
risks to the global economy, thereby posing a renewed downside risk to
Japan’s price trend,” he added.

Globally food and energy costs are rising in light of drought in
Russia and Northern China, flooding in Australia as well as two major
earthquakes in New Zealand since September. Growing civil unrest has
swept the Middle East, raising political uncertainties and crude oil
prices.

Tunisia ousted its president last month and Egyptian President
Hosni Mubarak resigned on Feb. 11 due to escalated anti-government
protests. Pro-democracy uprisings have spread to Yemen, Libya and
Bahrain, sending crude oil prices to $100 a barrel for the first time in
more than two years.

tokyo@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4835 **

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