MNI INSIGHT: BOJ Concerned Weaker Spending May Hit Price Hikes

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$$$$,MX$$$$]