By Izumi Nakagawa
TOKYO (Reuters) - The Japanese government plans to adopt a different measure of inflation to the central bank's, an official told Reuters, in a move that could mean it will take longer for Japan to be declared free of deflation and give ammunition to politicians advocating loose policies.
Prime Minister Shinzo Abe has made victory over nearly two decades of falling prices a top policy pledge. His "Abenomics" package of government spending and loose money from the Bank of Japan have sent stock prices sharply higher and the yen lower this year.
Whereas the central bank targets a 2-percent year-on-year rise in the core consumer price index, a measure that excludes volatile prices of fresh food, the government plans to use "core-core" CPI, which also excludes energy costs.
The change will effectively raise the bar for Abe's inflation goal, as it means that higher energy prices will be taken out of the equation.
The official, who was involved in the decision to switch to "core-core", said the change was meant to help ensure that the world's No. 3 economy truly breaks the grip of deflation.
"Unless we have price rises that aren't temporary, that won't reverse, we can't say we've escaped from deflation," the official said on condition of anonymity.
The change could result in more pressure being put on the central bank to keep flooding the market with yen as the inflation target becomes harder to achieve.
It could also complicate the government's plans to raise the nation's sales tax.
The BOJ has vowed to continue its massive easing -- which includes doubling the money supply through enormous purchases of government bonds and other assets --to generate modest inflation over the next two years.
Core CPI stopped falling in May, the latest reading, and many economists expect it to gradually rise above zero.
But the apparent fade in deflation partly reflects higher prices for imported oil and natural gas as a result of the weaker yen and the shutdown of nuclear power plants after the 2011 earthquake and tsunami.
In contrast, core-core CPI, although it has slowed its declines, remained down 0.4 percent on year in May. Some economists expect this measure to turn positive by year's end, but the government official said that might be optimistic.
Indeed, government data may understate the persistence of deflation.
Prices of 32-inch televisions, which are included in the CPI basket, have stopped falling, but price competition has merely shifted to larger-screen TVs, said an official at electronics mass-retailer Bic Camera Inc <3048.T>.
Similarly, McDonald's Holdings Co. (Japan) <2702.T> recently grabbed attention by raising prices on hamburgers and cheeseburgers, but a spokesman said the fast-food giant has cut prices of chicken nuggets and small fries.
CLOUDS TAX PROSPECTS
Of more immediate significance, the use of core-core CPI could affect the debate on doubling the consumption tax to 10 percent in coming years.
The previous government pushed through the tax hike in a bid to tackle Japan's enormous public debt, which at well over twice the nation's gross domestic product is the largest in the industrial world.
Abe's government is expected to decide around September on whether to proceed with the first stage, an increase to 8 percent next April, based on whether economic growth is strong enough.
Advocates of reflation in Abe's Liberal Democratic Party could more easily make the case that the recovery is too fragile to inflict a tax rise if the economy remains mired in deflation.
The party has painful memories of the political damage suffered by LDP prime ministers Noboru Takeshita and Ryutaro Hashimoto, when they introduced and raised the tax in the 1980s and '90s.
The tax debate has smoldered quietly in recent months, with some government advisers and LDP politicians urging caution in raising the levy, while the Finance Ministry argues that the tax rise is needed for Japan to put its fiscal house in order.
Finance Minister Taro Aso, himself a former LDP prime minister, said on Tuesday that in the tax-hike law, "it's written that we won't do it unless the economy has gotten better."
The debate is expected to heat up after a July 21 Upper House election, which Abe's coalition is expected to win, sealing his lock on power as he already controls the more powerful Lower House.
(Reporting by Izumi Nakagawa; Additional reporting by Shinji Kitamura; Writing by William Mallard; Editing by Simon Cameron-Moore)