(Bloomberg) -- Japan’s key consumer prices fell at a slightly slower pace in September but failed to log gains for a sixth straight month with economists expecting worse to come over the coming months.

A gauge of prices excluding fresh food fell 0.3% from a year earlier, largely reflecting the impact of government travel subsidies, following a 0.4% drop in August, the ministry of internal affairs reported Friday. Analysts had forecast a 0.4% decline.

The result comes ahead of a meeting next week where the Bank of Japan will give its latest inflation forecasts. While the latest data may help ease concerns of a descent into longer-term deflation for the time being, additional factors are expected to weigh on prices from next month.

Key Insights

  • The coronavirus pandemic has eliminated upward momentum in prices as the economy suffered a record contraction with restrictive measures weighing on consumption. Mounting job losses, falling wages and a slow recovery in spending are also likely to keep inflation weak.
  • Next week, the Bank of Japan is likely to consider slightly adjusting its inflation forecasts to reflect the short-term downward impact on prices of the travel subsidies, according to people familiar with the matter.
  • Japan is still close to a critical point where it could fall back into deflation even if the latest data don’t ratchet up those concerns, said Yuichi Kodama at Meiji Yasuda Research Institute. “The impact of the Go-To campaign isn’t bad itself since it’s helping push up consumer demand. And it’s a decline of a particular category, so I don’t think this particular point should raise deflation concerns,” he said.
  • Inflation is likely to weaken after October when it loses the upward support of a sales tax increase a year ago. Analysts forecast consumer prices will fall 0.6% in the October-December period.
  • The BOJ’s priority remains on keeping credit lines open to companies and is sticking to its 2% inflation target in the long term. Prime Minister Yoshihide Suga is calling for lower mobile phone fees as part of his reform agenda, indicating that inflation isn’t top of his agenda for now.

What Bloomberg’s Economist Says

“Another negative reading on core inflation would unlikely have significant implications for the Bank of Japan’s policy meeting in late October, given the central bank’s current focus on corporate funding support.”

--Yuki Masujima, economist

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  • Inflation excluding energy and fresh food was flat, compared with a 0.1% drop forecast by analysts.
  • Overall prices were also unchanged, in line with the analysts’ forecast.
  • The government Go-To-Travel subsidies helped push down accommodation charges by 30%, which dragged down the overall index down by -0.35 percentage point, a touch less than in August.
  • Deeper falls in electricity prices canceled out the impact of smaller drops in gasoline prices.

(Adds economist comment and more details from the release)

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