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MNI (London)
By Hiroshi Inoue
     TOKYO (MNI) - The Bank of Japan is concerned sluggish consumer demand
following the recent sales tax hike will make it difficult for firms to raise
prices, further hampering hopes of a pick-up in inflation, MNI understands.
     Although some in the BOJ think government measures to help mitigate the
impact from the tax hike will ease the situation, the overall feeling is that a
lack of real wage growth and lower real incomes is weighing on consumer
sentiment.
     --SPENDING TO FALL
     Private consumption is expected to decline temporarily into year-end after
Q3's strong sales ahead of the tax hike and the fall in real incomes, with
durable goods sales especially weak.
     The BOJ also sees a lack of pricing power in the restaurant sector, despite
not being subject to the October tax hike, as competition from ready-made meals
and 'at home' entertaining weighs.
     Although the BOJ still expects firms to increase wages, allowing an
increase in prices as consumers gain a greater tolerance for higher prices,
helping the output gap remain positive. However, the Bank understands the need
to watch consumption trends in coming months to see if there is any change in
the underlying trend.
     Any early conclusions drawn will be ready by the time of the late January
policy-setting meeting, when the board reviews its medium-term outlooks for
growth and inflation.
     The BOJ believes price-setting in the food service sector will not weaken
easily, with many firms continuing to push through minimum price hikes, but
there is a downside risk that weak consumer demand will eventually force firms
to lower prices and dent view that the service sector will lead the push to
higher prices.
     --HIGHER SERVICE PRICES
     October's Tokyo core consumer price index, a leading indicator of the
national inflation rate, rose 0.5% on year recording a 28th straight rise, with
the pace unchanged from September's gain, which was the lowest level since May
2018.
     Service prices, including prices for eating out, rose 1.0% in October vs.
0.3% in September. Prices for eating out rose 3.2% on year in October, up from
1.1% in September, reflecting the sales tax hike Processed food prices, which
accounts for 15% of the total CPI, rose 1.3% y/y in October according to Tokyo
data, accelerating from 1.2% in September.
--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
[TOPICS: MMJBJI,MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MX$$$$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com