Japan's consumer inflation eased in December for a fifth straight month and the rate of price rises could slow further or even turn negative as the economy adjusts to lower oil prices, analysts say.
The consumer price index (CPI) rose 2.5 percent in December from the year-ago period, government data showed on Friday, compared with Reuters' forecast for a rise of 2.6 percent and down from the 2.7 percent print in November.
The core Tokyo CPI for January, considered a leading indicator, rose 2.2 percent on year, in line with expectations and easing from 2.3 percent in December.
Excluding the effects of the sales tax hike, the nationwide consumer price index (CPI) rose 0.5 percent.
With the collapse in oil prices yet to be reflected in consumer inflation, analysts say the numbers will look worse in the coming months, dealing a further blow to the Bank of Japan's ambitious inflation targets.
"There is a six-month lag before global LNG (liquefied natural gas) prices are factored into electricity prices - and it's electricity prices, rather than the price of oil at the pumps, that counts for Japanese households," said Credit Suisse economist Takashi Shiono.
"The electricity companies are still scheduled to raise their prices in February, so we'll have to wait until April for the lower oil prices to filter through to the headline inflation numbers," he added.
Credit Suisse is forecasting the CPI to turn negative by April, assuming that current levels of oil and the dollar-yen holds. Shino expects CPI to fall by up to 0.3 percent in April and down 0.1 percent for the full-year ending March 2016.
The BOJ has been betting that its massive quantitative easing program unleashed since April 2013 will defeat inflation for good and bring CPI stripped of sales tax hike up to 2 percent by financial year ending March 2016. But market watchers see the goal increasingly unlikely especially in the wake of crashing oil prices.
Earlier this month, the BOJ cut its CPI forecast for 2015/16 to 1 percent from an earlier projection of 1.7 percent, reflecting the state of oil markets, where Brent Crude and Nymex futures lost more than half their value since last June.
"Inflation is still likely to moderate further. Less than half of the plunge in the price of crude oil has been passed on to consumers in the form of lower gasoline prices," Capital Economics' Marcel Thieliant said in a research note.
Still, Theliant believes the weakening yen could give prices a fillip especially for imported goods.
"Looking ahead, the renewed weakening of the exchange rate since October has resulted in a rebound in import prices. As a result, prices of non-energy consumer goods should start rising again soon/should rise more rapidly in coming months," he said.
"The upshot is that the Bank of Japan will still have to provide additional stimulus," he added.
The BOJ surprised markets in October last year by expanding its bond-buying program for the first time since in came into effect in April of 2013. Some analysts expect further easing as the central bank sought to meet its inflation targets.
Spending, output and jobs
In other data, household spending for December fell 3.4 percent from the year before, versus expectations of a 2.5 percent drop and after declining 2.5 percent in the previous month.
Industrial output rose an annual 1.0 percent in the month, compared with forecasts for a 1.3 percent rise and after falling 0.5 percent in November. The government raises its industrial output, noting output "is picking up moderately."
Meanwhile, the unemployment rate fell to 3.4 percent from 3.5 percent.
Japan's economy has been on the backfoot ever since the government raised nationwide consumption tax to 8 percent from 5 percent last April, in a bid to reduce the country's massive debt.
The economy slipped into recession in the third quarter, contracting an annualized 1.6 percent after shrinking 7.3 percent in the second quarter.
Although analysts expect the economy to have expanded an annualized 3.2 percent in October-December as the tax-hike pain subsides, a Reuters poll showed.