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UPDATE 1-Japan CPI falls, keeps pressure on BOJ to ease policy

Tetsushi Kajimoto
Watch Berkshire

* Sept core CPI -0.1 pct yr/yr vs forecast -0.2 pct

* Data keps pressure on BOJ to ease, end deflation

* BOJ seen cutting econ forecasts, easing on Oct. 30

TOKYO, Oct 26 (Reuters) - Japan's core consumer prices fell for the fifth straight month in the year to September, showing the economy remained mired in deflation and keeping the pressure on the central bank to do more to achieve its inflation target.

Friday's data comes amid renewed calls from lawmakers for the Bank of Japan to boost monetary stimulus at its Oct. 30 rate review, when it is expected to cut its growth projections and push back the timing for meeting its 1 percent inflation target.

It follows recent statistics showing last month's exports posted their biggest annual drop since the aftermath of the 2011 earthquake while manufacturers' mood hit its lowest since early 2010, as the diplomatic row with China threatens the export-reliant economy amid the global slowdown.

The 0.1 percent annual decline in core consumer prices in September was smaller than the median estimate for a 0.2 percent fall and a 0.3 percent drop in August.

But that largely reflected a rise in energy costs that are included in the calculation. The so-called core-core inflation index, which excludes food and energy prices and is similar to the core index used in the United States, fell an annual 0.6 percent.

``Rises in gasoline prices and electricity bills slowed the pace of decline in core CPI somewhat. But declines accelerated for core-core CPI, a sign that deflationary pressure persists,'' said Yoshiki Shinke, senior sconomist at Dai-Ichi Life Research Institute.

``Given weakness in the economy, deflationary pressure won't ease and may even strengthen. It's hard to expect prices to pick up as projected by the Bank of Japan. With the economy so weak, the BOJ is definitely expected to ease monetary policy next week.''

For the better part of past decade the world's third-largest economy has been caught up the vicious circle of price declines that discourage investment and make consumers put off spending, which in turn weighs on demand and output.

Core consumer prices in Tokyo, available a month before the nationwide data, dropped 0.3 percent in the year to October, against a 0.5 percent annual fall expected.

The central bank set a 1 percent inflation target and eased policy by boosting its asset-buying programme in February, and followed up with further stimulus in April and September.

The BOJ is expected to ease monetary policy next week for the second time in two months, by expanding asset purchases and may make a stronger commitment to continue pumping cash until it hits the inflation goal.

Japan's economy outperformed most of its peers in the Group of Seven in the first half of this year, helped by solid private consumption and reconstruction spending.

But weak external demand and a strong yen have led analysts to project growth will likely stall for the rest of this year, with some anticipating Japan may fall back into recession.

A territorial row with China that set off a wave of anti-Japanese sentiment and forced several Japanese companies to cut back production and sales in their biggest export market further amplified those concerns.

Prime Minister Yoshihiko Noda told his cabinet last week to prepare a fresh stimulus package by next month, but the plan's limited scope and lack of detail failed to impress markets.

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