Japan’s core consumer prices rose at a slower than expected pace in March and household spending fell more than expected in a worrying sign for the central bank that domestic demand won’t be strong enough to generate sustained inflation.

Stripping away energy costs, consumer prices actually fell for the first time in almost four years, suggesting an exit from the Bank of Japan’s radical quantitative easing programme is not imminent. Stripping away the effect of fresh food and energy, consumer prices fell 0.1 percent in March from a year ago due to lower prices for mobile phones, falling for the first time since July 2013.

 Japanese data surprised to the downside, but it didn’t have a significant impact on the JPY as the currency strengthened overnight. source: Bloomberg

The core CPI (a different measure) which includes oil products but excludes fresh food prices, rose 0.2 percent in March and posted the third straight month of increase on rising energy costs, Internal Affairs ministry’s data showed on Friday.

Industrial product in March also fell more that expected, but economists remain optimistic that output will quickly recover in the following month as strength in overseas economies increases export demand. Separate data showed industrial production fell 2.1 percent in March, a much bigger fall than the 0.8 percent decline expected, as electronics and car makers trimmed production. But manufacturers expect output to surge by 8.9 percent in April, suggesting the declines in March are temporary.

Japan’s long-stagnant economy has shown signs of life in recent months, with exports and factory output benefiting from a rebound in global demand. On Thursday, the BOJ kept monetary policy unchanged as expected, but offered its most optimistic assessment of the economy in nine years, buoyed by a pick-up in overseas demand. However, it seems that there’s still a long way to go before the BOJ’s is closer to its target, which doesn’t bode well for the JPY.

 If the USDJPY fails to break above 111.50 that could be a sign that more downside is ahead. In such situation a test of recent lows shouldn’t be ruled out.