By Mayumi Otsuma March 26 (Bloomberg) -- Japan’s consumer prices fell for a 12th month in February, adding pressure on the central bank to eradicate deflation that is hampering the economic recovery. Prices excluding fresh food slid 1.2 percent from a year earlier, after dropping a 1.3 percent in each of the preceding two months, the statistics bureau said today in Tokyo. Finance Minister Naoto Kan said the report shows more efforts are needed to overcome deflation even as price declines ease. The Bank of Japan last week doubled a credit program for commercial lenders to 20 trillion yen ($220 billion), a move Governor Masaaki Shirakawa said is aimed at lowering borrowing costs further to spur growth and prices. “An end to deflation isn’t in sight anytime soon, though the pace of price declines will moderate gradually,” Azusa Kato, an economist at BNP Paribas in Tokyo, said before the report. “The BOJ will probably decide policy direction not only based on price data but also the government’s moves.” The yen traded at 92.50 per dollar at 12:58 p.m. in Tokyo from 92.59 before the report was published. The currency has weakened 2 percent this week, spurring stocks and reducing the allure of government bonds. The Nikkei 225 Stock Average climbed 1.1 percent. The yield on Japan’s 10-year bond rose two basis points to 1.38 percent. Fewer Items Fall Deflation at least stopped spreading. The number of items in the consumer price index that became cheaper in February declined for the first time in 16 months, today’s report showed. Of the 524 goods in the index, prices of 335 fell, compared with 342 in January. Core price decreases have moderated since peaking at 2.4 percent last August, largely because of costlier crude oil. The February drop matched the median estimate of economists. “While the declines are becoming smaller, they’re continuing,” said Kan, who has led government calls for the central bank to help spur the economy. “More efforts are needed to beat deflation.” Bank of Japan board member Hidetoshi Kamezaki said yesterday that it’s “difficult to expect a turnaround of consumer-price declines anytime soon” because people’s expectations for deflation are growing, making it harder for companies to raise prices. Limited Scope Because of Japan’s record public debt, “the scope for fiscal stimulus is very, very limited to non-existent, but there’s probably more scope on the monetary side,” said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC, a unit of Prudential Financial Inc., which manages $667 billion. BOJ liquidity injections will support the economy and stock market even as deflation persists, he said on Bloomberg Television. Fast Retailing Co., operator of the clothing chain Uniqlo, said last week it started to sell sports clothes priced between 390 yen ($4.30) and 1,990 yen. Seiyu Ltd., a supermarket operator owned by U.S.-based Wal-Mart Stores Inc., this month sold women’s business suits for 3,800 yen, while rival Aeon Co. offered men’s suits for 7,800 yen in a 10-day campaign. Japan’s economic recovery, fueled by exports and industrial output, has yet to lift wages, which have fallen for 20 consecutive months through January. “With incomes still severe, consumers continue to pull their purse strings tight,” said Mari Iwashita, chief market economist at Nikko Cordial Securities in Tokyo. “Core prices won’t likely stop falling at least until fiscal 2012.” Cheaper Education Prime Minister Yukio Hatoyama’s plans to trim the cost of high-school education are also likely to drag prices down. The government will make public high school tuition free and provide subsidies to students enrolled at private institutions in the year starting April 1, pushing consumer prices 0.55 percentage point lower, according to Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. So-called core-core prices, which exclude energy and food and mirror the U.S.’s inflation index, fell 1.1 percent in February, moderating from a record 1.2 percent drop posted in December and January, today’s report showed. In Tokyo, core prices slid 1.8 percent in March on the year, the same pace as the previous month. The figures for the capital are released a month earlier than nationwide data, making them a harbinger of price trends. Tokyo prices fell a record 1.6 percent in the fiscal year ending March 31. Deflation shows “no signs of ending,” Pier Carlo Padoan, chief economist at the Organization for Economic Cooperation and Development, said in an interview in Tokyo after the report. BOJ board members may raise their price forecasts in their twice-annual outlook next month, given that the economy is improving at a faster pace than predicted, said Chiwoong Lee, a senior economist at Goldman Sachs Group Inc. in Tokyo. “Even if the deflation outlook is revised upward, prices remain firmly in negative territory,” Lee said. “We expect further minor easing” in the bank’s policy between April and June, the economist said, adding that options include expanding the credit program to 30 trillion yen or extending the lending period to six months from three. To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

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