Prices fell in Japan for the first time in over two years in August, the latest step backward in Prime Minister Shinzo Abe's quest to liberate the economy from the grip of deflation.
The core consumer price index fell 0.1% from a year earlier, government data showed Friday, a result that may add to pressure on the Bank of Japan to take additional action in the near future to revitalize efforts to spark 2% inflation.
The drop in prices is the first since April 2013, when Mr. Abe's hand-picked central bank chief Haruhiko Kuroda launched a radical monetary experiment to beat more than a decade of price falls. The index was flat in July, according to data from the Ministry of Internal Affairs and Communications.
The reading matched forecast of economists polled by The Wall Street Journal and the Nikkei.
Pressure is building on the BOJ to expand its easing measures with Japan's economy at risk of sliding into recession, the core price gauge worsening, and several measures of inflation expectations weakening. A similar combination of developments prompted the bank to beef up its annual asset purchase program in October 2014, to the current Y80 trillion.
"We continue to expect additional easing" at a planned Oct. 30 policy meeting, Naohiko Baba, Goldman's chief Japan economist, said in a recent note to clients. The BOJ's quarterly tankan survey of over 10,000 companies, due for release Oct. 1, will likely make additional easing more compelling by signaling a drop in corporate sentiment, other economists say.
Still, the central bank insists that inflation is returning, saying upward price pressure is masked by lower energy import costs, and Friday's data indeed showed that an inflation gauge excluding energy and all food except alcohol rose 0.8% in August, faster than July's 0.6% rise. But private economists suspect the improvement in the so-called core-core CPI isn't necessarily sustainable considering lackluster domestic demand.
Weaker international growth and lower oil prices are making it more difficult for many central banks to lift inflation rates to comfortable levels or scale back stimulus steps. The Federal Reserve put off an interest rate increase this month, while investors expect the European Central Bank to escalate its easing policy by the end of this year.
Japanese policy makers may find it difficult to simply play down worsening price figures as a global phenomenon, as they could delay a conversion of what Messrs. Abe and Kuroda call a "deflationary mindset."
Mr. Kuroda has made anchoring inflation expectations at 2% his top priority, saying Japan otherwise won't be able to escape a combination of deflation and stagnation dating to the 1990s. When the BOJ previously eased in October, Mr. Kuroda described it as a move to "pre-empt" drops in price expectations.
Tokyo is trying to regroup after two and half years of Mr. Abe's aggressive stimulus efforts have fallen short of expectations, but new plans announced Thursday by the prime minister are long on promises but short on details. Mr. Abe said he will increase the nation's annual economic output by some 20% to Y600 trillion, un-adjusted for price changes, without explaining how.