Deflation, which has stifled the Japanese economy for almost eight years, showed fresh signs of easing in October as core consumer prices ended a four-month streak of minor declines.
Analysts said the data reinforced the market's belief that the world's number two economy will return to modest inflation in early 2006, setting the scene for the Bank of Japan to end its super-expansionary monetary policy.
Core consumer prices in Japan were flat in October from a year earlier, official figures showed today, in line with expectations. Month-on-month, the consumer price index edged up 0.1% to post a third straight monthly rise.
However, although the nationwide index held steady, core consumer prices in Tokyo, a leading index of national trends, dropped 0.3% in November from a year earlier to represent a continuous fall for six years and two months.
The Bank of Japan has been flooding the banking system with cash since March 2001 in an effort to stem falls in consumer prices and stimulate growth in addition to keeping interest rates effectively at 0%.
Japan has been caught in the grip of deflation for over seven years but is now on the road to recovery after a decade-long slump triggered by the bursting of the 'bubble economy' in the early 1990s.
The Bank of Japan has vowed to maintain its quantitative easing policy until deflation gives way to mild inflation for a sustained period. Last month it said it now expects consumer price changes to reach zero or turn positive towards the end of 2005 and signalled that an end to its super-loose policy was likely sometime after April next year.
The remarks sparked concern among senior government officials who fear such a move could spark a return to deflation, which is seen as bad for an economy because it encourages consumers to put off purchases and dents company profits.