MNI ANALYSIS: BOJ Sees Underlying Prices Up But Still Cautious

By Hiroshi Inoue

     TOKYO (MNI) - Japan's core inflation indicator excluding fresh food prices

picked up slightly to a 1% year-on-year rise in February, as expected, but Bank

of Japan officials remain cautious about the outlook as the latest gain was led

by hotels, overseas holiday tours and other volatile factors, MNI understands.

     The prices for household durable goods and processed food, which BOJ

officials believe are the key to a steady rise in consumer prices, have been

weak.

     BOJ officials think it takes time for retail price markups to be fully

reflected in CPI data as consumer prices are still slow to respond to the

sustained economic growth and the tightness of labor market conditions.

     But officials expect the momentum toward achieving the 2% inflation target

to increase in the coming months. They are monitoring the pace of wage and price

hikes in fiscal 2018 starting in April.

     --OVER 3-YEAR HIGH

     The national average core consumer price index (excluding fresh food) rose

1.0% on year in February, as expected, with the pace of increase accelerating

from 0.9% in January due to higher y/y gains in gasoline and heating oil prices.

     It was the fastest pace of increase since +1.0% in September 2014,

excluding the direct impact of the sales tax hike that year, but it is still

halfway toward the BOJ's 2% inflation target.

     The 14th straight year-on-year rise in February was also led by larger y/y

gains in accommodations, overseas holiday tours and mobile phones as well as

smaller y/y drops in mobile communications costs.

     As seen in the February Tokyo CPI data released last month, Chinese

tourists rushed to Japan during the Lunar New Year holidays in February, pushing

up the prices for accommodations here, while strong Japanese demand for

traveling to South Korea for the PyeongChang Winter Olympics led to higher

prices for overseas tours.

     The core-core CPI (excluding fresh food and energy) rose 0.5% on year in

February after +0.4% in January, posting the highest gain since +0.5% in July

2016 but also showing it still takes time for the underlying inflation trend to

pick up.

     The pace of y/y increase in this narrow inflation indicator is expected to

rise above 1.0% in the coming months, BOJ officials believe.

     --SLOW GOODS PRICES

     The goods prices excluding volatile fresh food prices rose 1.8% on year in

February, with the pace of increase slightly faster than +1.7% in January. The

pace of increase in overall goods prices stayed high at +2.7% in February,

unchanged from January in light of continued high prices for fresh vegetables

and fish.

     The prices for processed food (canned food, bread, snacks, beverages,

etc.), which accounts for 15% of the total CPI, rose 1.1% on year in February

after +1.2% in January.

     --SERVICES UP SLOWLY

     The prices for services ranging from rents and restaurants to medicine and

communications rose 0.3% on year in February, up from +0.1% in January, partly

due to labor shortages.

     The prices for eating out rose 0.6% on year in February vs. +0.5% in

January, indicating the number of companies that are raising prices amid higher

raw material and labor costs is gradually growing.

     But the pace of y/y increase in service costs, the key to pushing up the

core CPI, remains slow as some companies are resisting price hikes amid tough

competition by investing in technology and curtailing business hours to cut

costs.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

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