The challenge facing the Bank of Japan to vanquish nearly two decades of deflation, let alone meet a new target of 2 percent inflation, was laid out on Friday by data showing core consumer prices fell in annual terms for a third straight month in January.
There was some favourable news for policymakers, as finance ministry data on capital expenditure raised the possibility a 0.1 percent contraction in fourth-quarter economic growth could be revised away when final GDP data is released on March 8.
The data came one day after Prime Minister Shinzo Abe nominated a new governor and two deputy governors for the Bank of Japan as he seeks to transform the central bank into a more aggressive deflation fighter willing to try radical policies.
Core consumer prices, which exclude fresh food but include energy, fell an annual 0.2 percent in January, the ministry of internal affairs said, matching the median forecast in a Reuters poll.
More worrying, the so-called core-core price index, which excludes food and energy and is similar to the core index used in the United States, declined an annual 0.7 percent, faster than a 0.6 percent decline in the year to December.
The BOJ may leave policy on hold when it meets next week, but once the new leadership is installed next month the central bank is expected to ease to mark the start of bolder purchases of government debt and other assets.
"Price declines could narrow from the summer as the economy recovers and as the cost of utilities rise," said Yusuke Ichikawa, economist at Mizuho Research Institute.
"The output gap will narrow, but it won't happen quickly. It could take five or six years to truly beat deflation."
Core consumer prices in Tokyo, available a month before the nationwide data, declined 0.6 percent in the year to February.
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Signs of Life
Fourth-quarter capital expenditure rose a seasonally adjusted 0.9 percent, according to the finance ministry's corporate survey. The cabinet office uses the ministry's data to calculate revised GDP, which is due next Friday.
Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities, said that data suggested GDP figures could be revised up to show the economy was flat in the October-December quarter, rather than contracting for a third successive quarter.
Other data showed small improvements in the labour market, with the seasonally adjusted unemployment rate falling to 4.2 percent from a revised 4.3 percent in December, the internal affairs ministry said.
The jobs-to-applicants ratio rose to 0.85 in January, beating forecasts and the highest reading since August 2008, data from the labour ministry showed.
Abe won a big election victory in December promising to revive the fortunes of an economy stuck in the doldrums for most of the past two decades. He has repeatedly called for a more aggressive central bank willing to take radical steps.
On Thursday, Abe nominated Asian Development Bank President Haruhiko Kuroda, an advocate of aggressive monetary easing, to be the next Bank of Japan governor.
The BOJ last month agreed to a 2 percent inflation target that Abe had been calling for, but central bankers must now come up with ways to shake nagging deflation.