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Japan Inflation Falls for the Third Straight Month

Japanese consumer prices fell in April, making this the third straight month of declines and doing nothing to change the view that the Bank of Japan will wait until August to raise interest rates.

The core consumer price index (CPI), excluding volatile fresh food prices, fell 0.1% in April from a year earlier, slowing from a 0.3% fall in March, government data showed on Friday.

That was in line with the median market forecast. Fewer than a third of the economists surveyed by Reuters prior to the data had expected a 0.2% fall, while one had forecast a flat reading.

The core CPI for the Tokyo area, which is released a month ahead of the nationwide figures, was flat in May, also matching the consensus forecast. It was flat in April.

The data sent the Japanese yen slightly higher against the dollar and euro on Friday while government bond futures opened flat. "The number was exactly in line with the consensus, so there is absolutely no surprise there," said Norihiro Fujito, a general manager of investment research at Mitsubishi UFJ Securities.

Most economists expect year-on-year changes in core CPI to stick around zero or be slightly negative in the near future.

"Core CPI is likely to continue to post a small year-on-year fall for a considerable period, until around October. It may occasionally touch zero but it's hard to see it coming back to positive territory until then," said Takahide Kiuchi, senior economist at Nomura Securities.

But BOJ Governor Toshihiko Fukui said earlier this month that the BOJ can raise rates even when core CPI is falling, as long as it has a strong conviction that prices will rise more.

Prices have so far not responded much to the steady growth in the world's second-largest economy, which has been enjoying its longest period of expansion in the postwar era, albeit at a slower pace than during previous growth phases.

But the BOJ has said it would raise interest rates gradually, warning that keeping them too low for too long could hurt the economy and prompt an excessive buildup in so-called yen carry trade and real estate investments.

Most investors expect the BOJ to hold off from raising rates at least until August so that it can confirm that prices are on the rise, risks from external factors are waning, and Japan's upper house election in July is out of the way.

The BOJ raised the key overnight call rate target to 0.25% from zero last July and to 0.5% in February.

The Bank of Japan's twice-yearly outlook report in April showed that its Policy Board's median forecast for the core CPI in the current fiscal year to next March was for a 0.1% increase and for a 0.5% rise in fiscal 2008/09.

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