AP Business Writer
TOKYO (AP) -- Japan's consumer price index fell 0.9 percent in March from a year earlier, underlining the challenge of ending a long spell of debilitating deflation despite an onslaught of monetary easing and stimulus spending.
Citing expectations that the policies will soon turn take hold, the central bank raised its inflation forecast for the coming two years. The Bank of Japan, whose policy board met Friday but left monetary policy unchanged, said it expects inflation to hit a 2 percent target within that time despite uncertainties in both the domestic and global economies.
In its revised outlook, the central bank said the economy was likely to grow at a "pace above its potential" and return to a moderate recovery by mid-2013.
Prime Minister Shinzo Abe took office in December vowing to vanquish deflation, or falling prices, that tend to discourage business investment and weaken growth.
Bank of Japan Gov. Haruhiko Kuroda, appointed in late March, has thrown his support behind that effort, committing to reaching the inflation target within two years by stepping up monetary easing so as to double the monetary base -- the amount of cash circulating in the economy and held as bank reserves.
So far there has been scant sign of any shift, though the economy did emerge from recession, barely, in the last quarter of 2012.
Kuroda told reporters that the target could be reached by 2015.
"Consumer spending is showing signs of strength, although so far there has been no significant shift toward more corporate investment," he said.
The 0.9 percent decline in prices in March compared with a 0.7 percent drop in February, though the inflation benchmark rose 0.2 percent from the month before. Core consumer prices excluding food fell 0.5 percent year-on-year.
The central bank's forecast on Friday noted a slew of uncertainties that could skew trends in either direction, saying its outlook was based on an assumption that global financial markets will remain stable and that a weakening of the yen would help boost Japan's exports.
It also is assuming a tightening in the labor market that would push wages higher, and increased investment by businesses.
"Given these assumptions, in fiscal 2013 a virtuous cycle among production, income and spending is expected to start working, triggered by increases in public investment and exports," its report said.
Inflation may be boosted by rising costs for imported energy and other commodities due to the weakening of the Japanese yen against the U.S. dollar and other currencies, the BOJ said.
The inflation forecast includes the impact from anticipated increases in the sales tax, by 3 percentage points in 2014 and another 2 points in 2015. The BOJ said it also took into account expectations that consumers would increase spending so as to make purchases before the tax hikes take effect, as well as the expected ensuing decline in demand.
The weakening of the yen due to Japan's effort to reflate its economy and get growth back on track has raised concerns over possible competitive devaluations by other countries. The Group of 20 leading economies and organizations such as the International Monetary Fund have backed Tokyo's approach but warned it must act to reduce its public debt, which is the highest among major industrial economies.
Despite the upbeat revision in the BOJ's outlook, the fragility of the economic recovery so far is raising doubts over whether Abe's government will fulfill a commitment by the previous administration to raise the sales tax to help balance public finances.
Chief Cabinet Secretary Yoshihide Suga told reporters Friday that the government still intends to undertake "fiscal rehabilitation."
But he said the government may need to reassess how quickly it can reduce its deficit spending.
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