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Japanese Consumer Prices Dip in February

Japanese nationwide core consumer prices edged down as expected in February from a year ago, the first fall in 10 months, reinforcing the view that a lack of inflation will keep the pace of the BOJ's credit tightening slow.

But industrial production fell less than expected in the same month and manufacturers output is expected to grow in March and April, suggesting Japanese manufacturers, the engine of the economy, aren't having any problems.

"Financial markets will be torn between weak price figures and firm production figures," said Naomi Hasegawa, senior bond strategist at Mitsubishi UFJ Securities.

The markets reacted little to the flurry of data, with many Japanese investors sticking to the sidelines on the last business day of their financial year to March 31.

The nationwide core consumer price index (CPI), which excludes volatile fresh food prices, in February fell 0.1% from a year earlier, in line with economists' consensus forecast, government data showed on Friday.

The core CPI for the Tokyo area, which is announced a month before nationwide figures, dropped 0.1% in March, below a consensus market forecast for a flat reading and pointing to limited inflationary pressures ahead.

"Overall the trend of price changes is around zero percent," said Mamoru Yamazaki, chief economist at RBS Securities. "For the time being, energy-related prices are likely to be under pressure to decline year-on-year due to a stabilization in crude oil prices, and the chances are high that consumer prices will continue to fall year-on-year," Yamazaki said, adding that such a trend could continue until the third quarter.

Separate data showed industrial production fell 0.2% in February from a month earlier, less than a median market forecast for a 0.8% fall.

Manufacturers' output, which is the core component of production, is expected to rise 1.5% in March and to grow another 1.3% in April, the data also showed.

The results came ahead of Monday's release of the BOJ tankan corporate sentiment survey for March, which is expected to show a slight worsening in big manufacturers' business confidence.

"Given the strength in the output data, there is a chance the BOJ's tankan (on April 2) could swing higher than expected," said Hasegawa at Mitsubishi UFJ Securities.

Other government data showed Japan's unemployment rate stayed at 4.0% in February, matching a consensus market forecast.

Overall household spending in February rose 1.3% from a year earlier, beating economists' median forecast of a 0.5% rise and following an unexpected rise of 0.6% in January.

Most market players also expect no policy changes by the Japanese central bank in coming months after its rate hike in February. Many analysts expect the next rate rise to come in July-September at the earliest.

BOJ Governor Toshihiko Fukui told parliament earlier this week that while core CPI growth may turn negative in the near term on falling crude oil prices, prices are in a broad uptrend in the long run.

Japan's economy grew 1.3% in the three months to December, thanks to robust corporate capital investment and a rebound in consumption. The annualized growth rate of 5.5% was the highest since October-December 2003, when it stood at 6.3%.