Japan July inflation stagnates, lacks demand-driven support

By Leika Kihara

TOKYO (Reuters) - Japan's core consumer prices rose 0.8 percent in July from a year earlier, unchanged from the previous month's gain, adding to evidence the central bank is making little headway in achieving its elusive 2 percent price target.

Subdued wage and price growth have forced the BOJ to extend its massive stimulus programme despite the rising risks of the policy, such as the hit to bank profits from near-zero rates.

The BOJ last month conceded that inflation will miss its elusive 2 percent target until early 2021 and took steps to make its policy framework more sustainable.

The rise in the nationwide core consumer price index (CPI), which includes oil prices but excludes volatile fresh food prices, fell slightly short of a median market forecast for a 0.9 percent gain.

"Consumer price gains remain driven by volatile fresh food and energy inflation while underlying inflation remains subdued," said Marcel Thieliant, senior Japan economist at Capital Economics.

"Price pressures should strengthen ahead of next year's sales tax hike but inflation is set to remain well below the BOJ's 2 percent inflation target."

The so-called core-core inflation index, a more closely watched gauge the BOJ uses to strip away the effect of both energy and fresh food costs, was up 0.3 percent year-on-year in July after rising 0.2 percent in June, government data showed on Friday.

The data underscores the challenge the central bank faces in eradicating an entrenched deflationary mindset that discourages firms from raising prices for fear of scaring away cost-sensitive consumers.

"The BOJ will likely maintain its zero percent target for 10-year government bond yields for the time being to support the economy and prices," said Takeshi Minami, chief economist at Norinchukin Research Institute.

Wage growth remains key. While intensifying labour shortages force companies to hike hourly pay for temporary workers, they remain reluctant to raise permanent workers' salaries for fear of incurring higher fixed costs.

Japan's economy rebounded in the second quarter from a contraction in the first three months of this year thanks to robust household and business spending.

Real wages rose at their fastest pace in more than 21 years in June, thanks mostly to higher bonus payments, offering policymakers some hope that consumption will gain momentum and encourage firms to raise prices.

(Reporting by Leika Kihara; Editing by Eric Meijer)