Japan mired in deflation, keeping pressure on BOJ

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Japan marked nine months of deflation in November with increasing signs that weak demand is hitting prices, adding to the political pressure on the Bank of Japan for further monetary easing.

While the pace of falling prices slowed in the year to November as the effect of oil price falls faded, that offers little solace to policymakers worried about the risk of another recession.

An index stripping out both energy and food prices fell at a near-record pace, showing weak final demand was playing an increasing part in pushing down prices.

"No one thinks deflation will end soon and today's data won't change that perception," said Naoki Murakami, Chief Economist at Monex Securities.

With Japan's huge public debt limiting room for additional fiscal stimulus, the government may push the BOJ to ease monetary policy further next year, analysts say, such as by increasing its purchases of government bonds.

"Japan's public finances are the worst among developed nations, so the risk of a credit downgrade next year is real," said Yasuhide Yajima, a senior economist at NLI Research Institute.

"The government will surely pressure the BOJ to do more such as boosting its public debt purchases. The central bank might be reluctant to do so but won't have much choice but to comply."

An inflation index that excludes food and energy prices and is similar to the main index used in the United States, fell 1.0% in November from a year earlier, near a record 1.1% drop hit in October.

Japan's core consumer price index, which includes oil products but excludes volatile fresh fruit, vegetables and seafood, matched a median market forecast of a 1.7% drop.

That was less than a 2.2% fall in the year to October, as a big slide in oil prices eases.