By Leika Kihara and Kaori Kaneko

TOKYO (Reuters) – Prime Minister Yoshihide Suga is making life tougher for the Bank of Japan as carriers respond to his calls to cut cellphone charges, a move seen as adding deflationary pressure on the country’s already weak economy.

Suga has publicly said he believes Japan’s cellphone fees are too high and that carriers are a monopoly, a message seen as resonating with younger voters.

Nodding to the pressure, major Japanese carriers NTT Docomo, KDDI and Softbank announced plans to cut charges by up to 20% from as early as March.

That could push down the core consumer price index, which fell 0.6% in January from a year earlier to mark the sixth straight month of falls, by as much as half a percentage point, analysts say.

The move highlights how deflation remains the BOJ’s primary headache, even as its U.S. and European peers face communication challenges posed by recent rises in inflation.

It also shows how in Japan, even seemingly straightforward government decisions can have vast ramifications for the BOJ, given the spectre of deflation.

“Unlike in the United States, government policies work to push down inflation in Japan,” said Mari Iwashita, chief market economist at Daiwa Securities.

“Japan is a country where companies struggle to raise prices because consumers are so sensitive to price hikes,” she added.

(Graphic: Japan is facing rising deflationary risks, https://graphics.reuters.com/JAPAN-ECONOMY/DEFLATION/jznpnolgjvl/chart.png)

(For an interactive graphic on Japan’s core consumer price index, click here https://tmsnrt.rs/3qAtiXc)

Cellphone fees have a big influence on Japan’s price gauge because they have the fourth highest weighting among the 523 components making up the core consumer price index (CPI).

The resulting fall in core CPI would mostly offset an expected boost from a recent rise in energy costs and the base effect of last year’s pandemic-induced sharp declines, analysts say.

Excluding any impact from cellphone fee cuts, analysts expect core consumer prices to start creeping up by mid-year but rise only modestly thereafter.

“Bottom line, Japan’s trend inflation is quite weak because demand is sluggish,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

To be sure, lower fees would give households money to spend on other items. Fees for a 20-gigabyte plan in Tokyo are highest among the world’s six major cities and triple the sum in London, according to a Japanese government survey last year.

But data so far paints a bleak consumption outlook.

Bank deposits jumped a record 15.5% in January from a year earlier to 827 trillion yen ($7.83 trillion), 1.5 times the size of Japan’s economy, as households save rather than spend.

Real wages fell 1.2% last year, the fastest pace of drop since 2014. Nearly three quarters of firms have no plan to offer blanket base pay hikes at this year’s labour talks, a recent Reuters poll showed.

Takumi Harada, a 27-year-old engineer, says he would consider switching plans to reduce the 6,000 yen in smartphone fees his family pays each month.

But he has no intention of spending the extra money on other items. “I think I’ll just save,” he said.

($1 = 105.5800 yen)

(Reporting by Leika Kihara and Kaori Kaneko, additional reporting by Kentaro Sugiyama; Editing by Raju Gopalakrishnan)

FRANKFURT (Reuters) – Euro zone inflation is still distant from the European Central Bank target and a strong euro posed an added danger, ECB policymakers concluded last month, the accounts of their Jan 21 meeting showed on Thursday.

The ECB left policy unchanged last month but warned that a recent surge in COVID-19 infections posed a risk to the euro zone’s recovery and raised the chance of a delayed recovery.

Data since the meeting have all pointed to an even weaker start of the year than earlier projected as vaccinations were proceeding slowly and countries were extending lockdown measures, keeping much of the services sector shuttered.

“Concerns were voiced, however, over developments in the exchange rate that might have negative implications for euro area financial conditions and, ultimately, consequences for the inflation outlook,” the ECB said.

“Ample monetary stimulus remained essential,” the ECB added.

Policymakers were more sanguine about a rise in bond yields, saying they remained at historical lows once adjusting for inflation.

“It was maintained that not every increase in nominal yields should be interpreted as an unwarranted tightening of financing conditions and trigger a corresponding policy response,” the ECB said.

Having extended stimulus well into next year in December, the ECB is under no pressure to act anytime soon, as it has already allotted enough firepower to keep borrowing costs down, in line with its commitment to keep borrowing costs stable.

The election of former ECB chief Mario Draghi as Italy’s prime minister also buoyed markets, welcome relief for the ECB as Italy’s ballooning debt is one of the top headaches for policymakers.

(Reporting by Balazs Koranyi; Editing by Francesco Canepa)

By Yoshifumi Takemoto

TOKYO (Reuters) – Bank of Japan Governor Haruhiko Kuroda said on Thursday he explained to Prime Minister Yoshihide Suga the central bank’s plan to conduct a review of its policy tools in March.

“I explained how the global economy was picking up, and how the BOJ needed to conduct the review to continue its ultra-loose monetary policy,” Kuroda told reporters after meeting with Suga.

Kuroda said Suga did not have any particular comment on the BOJ’s March review and the two did not discuss the Tokyo Olympic Games.

The BOJ governor and the prime minister hold meetings once every few months as a regular practice to exchange views on the economy and policy.

The BOJ unveiled a plan to review its policy tools in March to make them “more sustainable and effective,” as the hit to growth from the coronavirus pandemic forces the central bank to maintain its massive stimulus programme for a prolonged period.

(Reporting by Yoshifumi Takemoto, Writing by Leika Kihara; Editing by Jacqueline Wong)