MNI INSIGHT: BOJ Cautious About CPI After Dec Tokyo Rise Slows

By Hiroshi Inoue

     TOKYO (MNI) - Tokyo's year-on-year core consumer price index slowed in

December from the previous month's reading, undermining Bank of Japan

expectations for a pick-up in the pace, although BOJ officials will maintain the

view that momentum towards target is on track, MNI understands.

     BOJ policymakers will maintain their view that the momentum toward the 2%

price target is "maintained" as the upward pressure on prices stemming from the

improving output gap continues.

     That is despite the pickup in inflation being slower than the BOJ

previously expected, restricted by structural factors noted by the central bank

back in July. Officials remain vigilant over the inflation outlook as firms are

still cautious about raising retail prices amid lackluster consumer demand.

     The upward pressure on prices from rising materials and labor costs has

been somehow offset by corporate efforts to raise labor productivity by

investing in automation and information technology.

     Continued slow rise in consumer prices will likely prompt the BOJ board to

revise down the median forecast for inflation rate in the current fiscal year

from October's call of 0.9% and 1.4% for fiscal 2019.

     --TOKYO CPI SLOWS

     In central Tokyo, a leading indicator of nationwide price data, core CPI

rose 0.9% on year in December for the 18th straight year-on-year rise. However,

the pace of increase decelerated from 1.0% seen in each of the last three

months.

     The data indicates the year-over-year rise in the national core CPI will

also decelerate in December from the 0.9% rise in November. The December data

will be published on Jan. 18, 2019.

     The core-core CPI (excluding fresh food and energy) -- a key indicator of

the underlying trend of inflation -- rose 0.6% on year in December, unchanged

from November's rate.

     --GOODS PRICES SLOW

     BOJ economists are discouraged by lower goods prices in the December Tokyo

CPI data, increasing BOJ concern over the outlook for nationwide inflation rate.

     The prices of goods excluding volatile fresh food fell 0.1% on year in

December, with the pace of increase decelerating from 1.2% in November,

indicating that corporate price-hike activity hasn't expanded.

     --SERVICE PRICES RISE

     One bright spot for BOJ officials are service prices, which account for

just over a half of the CPI basket. They rose 0.7% on year in December,

accelerating from 0.5% in November.

     The prices for eating out rose 1.2% on year in December, also accelerating

from 1.0% in November, indicating that corporate price hikes are spreading in

certain sectors, albeit slowly.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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