Japan consumer price rises pick up pace

Women walk past a sale sign in Japan Policymakers are hoping that rising consumer prices will help stoke domestic demand in Japan

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Consumer prices in Japan rose at the fastest pace in five years in October, suggesting policymakers' attempts to end years of deflation are working.

Consumer prices, excluding food, rose 0.9% from a year earlier. Prices have now risen for five months in a row.

Japan has been battling deflation, or falling prices, for best part of the past 20 years.

It is seen as a major drag on its economy and policymakers have unveiled a series of measures to end the cycle.

While falling prices may sound good to those experiencing inflation, they hold back economic growth as consumers and businesses tend to put off purchases in the hope of getting a cheaper deal later on, which hurts domestic demand.

Hidenobu Tokuda, an economist at Mizuho Research Institute, said the latest data indicated the world's third-largest economy was "making progress toward ending deflation".

"We expect core inflation to approach 1% at the end of this year and then to rise more gradually next year."

Japan's central bank has set a target of achieving an inflation rate of 2%.

Domestic demand

While consumer prices have started to rise, the rise in inflation so far has been mainly stoked by the rising cost of fuel imports, the result of a weak yen, rather than by an increase in domestic demand.

Japanese Yen v US Dollar

Last Updated at 17 Dec 2014, 14:40 ET JPY:USD twelve month chart
¥1 buys change %
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Japan's aggressive measures have seen its currency weaken nearly 25% against the US dollar this year, making imports more expensive.

At the same time, Japan has suffered a shortage of energy since the closure of almost all the country's nuclear reactors, following the earthquake and tsunami of 2011.

As a result, it has been importing much of the energy it needs. Increased fuel imports, coupled with a weak yen, have contributed significantly to the price rises seen in the past months.

However, in an encouraging sign for policymakers, a narrower measure of prices, which excludes both food and energy costs, also rose in October, indicating that domestic demand may be starting to pick up.

According to the latest data, prices excluding food and fuel rose 0.3% in October, from a year earlier - the biggest jump in 15 years.

Other data released on Friday showed that industrial output in Japan rose 0.5% in October from the previous month.

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