TOKYO (AFP) - Spending among Japanese households tumbled last month and consumer prices fell again, data showed Friday (Sept 30), after the Bank of Japan announced it was overhauling a faltering bid to conquer deflation.
The disappointing data marked the latest red flag for the world's number three economy, and will put officials under ever-more pressure to find a way to kick-start growth.
Government figures showed that household spending in August shrank 4.6 per cent from a year ago, way below expectations for a drop of around two per cent.
Core consumer prices, excluding volatile fresh food prices, fell for the sixth straight month, dropping 0.5 per cent on-year - way below the BoJ's two-per cent inflation target.
However, the labour market remained tight with unemployment at a multi-decade low of 3.1 per cent while factory output rose a stronger-than-expected 1.5 per cent last month.
"The continued decline in underlying inflation should ring the alarm bells at the Bank of Japan," said Marcel Thieliant at research house Capital Economics.
"Looking ahead, we expect underlying inflation to fall further to zero in coming months, which indicates that the Bank of Japan still has plenty of work to do to reach its two percent inflation target."
Japanese officials are under intense pressure to deliver, as many economists increasingly write off Prime Minister Shinzo Abe's spend-for-growth policy to fire up the economy, dubbed Abenomics.
Last week, the BoJ, which launched a massive bond-purchase programme to stimulate growth, revealed yet another exotic weapon in its monetary policy arsenal.
After a hotly anticipated meeting, the bank said it would switch its emphasis from interest rates and concentrate its firepower on 10-year government bonds.
Governor Haruhiko Kuroda said the bank would buy as many or as few of these benchmark instruments as necessary to ensure the yield - the interest rate paid to holders - remained steady at around zero.
The bank said it would cut back on the number of longer dated bonds the bank holds. That should reduce the price of long-term securities, which - in turn - should increase their yield.
It was the latest effort to convince Japanese consumers that the price of goods and services will rise in the future.
Some analysts, however, said the move was an admission of defeat and a warning of the limits of central bank power.
On the government side, Tokyo in July announced a whopping 28-trillion-yen (S$378.09 billion) package aimed at kick-starting growth, after Britain's June vote to quit the European Union sent financial markets into a tailspin and sparked a yen rally.
But Abe's promises to cut through red tape have been slower, and his plan to buoy Japan's once-booming economy have looked increasingly unrealistic.
Japan's economy contracted in the last three months of 2015, before bouncing back in January-March with a 0.5 percent rise on-quarter and then a 0.2 perc ent expansion in April-June.
Friday's data come ahead of the BoJ's closely watched Tankan quarterly business sentiment survey, due Monday.
Economists expect the headline confidence index among large manufacturers to tick up in the October report, according to a Bloomberg survey.