Japan has overcome deflation for the first time in more than two years, but only because of food and energy shortages caused by the tsunami.
Japan has been battling deflation, or falling prices, for more than a decade. With Japanese consumers reluctant to go out and spend, deflation became entrenched in the late 1990s. A healthy economy needs to have a modest amount of inflation to keep growing. When prices are falling, consumers and businesses spend even less because they wait for things to become cheaper.
Ratings agency Fitch revised Japan's outlook to negative from stable this morning, warning about rising government debt and the risk to the public finances from the still unknown costs of the nuclear crisis at Fukushima. The yen fell against the dollar and the euro on the news.
Consumer prices rose after fuel imports surged following the nuclear crisis. Higher energy costs pushed prices excluding fresh food up 0.6% in April from a year ago, according to the Japanese statistics bureau. Including food, prices rose by 0.3%. However, Kaoru Yosano, Japan's economy minister, said the data does not point to sustained gains. Economists noted that when energy and food costs are stripped out, prices are broadly flat.
The devastation caused by the earthquake and tsunami has pushed Japan's economy, the world's third-largest after the US and China, back into recession, with GDP down 0.9% in the first three months of the year, the second quarter of contraction. Factory production and consumer spending both suffered record falls in March.
"Commodities and crude oil prices are pushing the inflation figures up," said Credit Suisse chief economist Hiromichi Shirakawa. "Although I expect consumer spending will recover in May and the months ahead in the wake of the disaster, wages and salaries haven't risen. I'm concerned about consumer spending towards the summer."
Unlike central banks in China and India, which have started tightening monetary policy to rein in inflation, the Bank of Japan is still expected to ease policy. It discussed the possibility of expanding an emergency lending programme to quake-hit banks at a meeting at the end of April when it left its key lending rate near zero.
"The bank will probably add stimulus if it sees more signs of weakening demand," said Azusa Kato, an economist at BNP Paribas in Tokyo. "If you strip out energy and food costs, consumer prices are basically flat now."