MNI INSIGHT: BOJ Encouraged by April CPI Boost, But Still Slow

By Hiroshi Inoue

     TOKYO (MNI) - The Bank of Japan sees encouraging signs in April's

acceleration in the nationwide consumer price index, although it remains

cautious as the speed of the pick-up is sluggish and the Philips Curve still

appears somewhat detached, despite a widening output gap, MNI understands.

     BOJ officials saw a spill over from recent corporate price hikes into the

nationwide inflation rate through April, with the underlying trend also

remaining solid, although higher costs in some service sectors weren't passed on

to the consumer. They remain concerned that the pace of gains isn't

accelerating, appearing to underperform Japan's output gap.

     As supply across the economy tightens and demand firms, Japan's estimated

positive output gap widened to 2.23 percentage points in Q4 2018, up from Q3's

1.26 percentage points.

     It was the ninth straight quarter with a positive reading and the BOJ

expects it to flow through to increased upward pressure on both consumer prices

and inflation expectations, albeit with a lag of a few quarters.

     The influence of the output gap on Japan's inflation rate, in part

recognized in the Phillips Curve, continues to show a relatively weak

correlation, with BOJ officials not seeing an expected upward shift or

steepening, in part due to a rise in inflation expectations.

     --PRICE RISES SPREADING

     Nationwide core consumer price index rose 0.9% in April for a 28th straight

gain, accelerating from March's 0.8%, although the gain was smaller than that

suggested by this month's Tokyo CPI (+1.3%vs +1.1% in March).

     Goods prices excluding volatile fresh food prices picked up to 1.4% on

year, with the positive contribution rising to 0.20 percentage point in April

from 0.17 pp in March.

     Prices for processed foods, which accounts for 15% of the total CPI that

BOJ officials are focused on, rose 0.8% on year in April, up from +0.6% in

March, indicating that corporate price hikes are gradually spreading.

     Although service prices accelerated in April, prices for eating out were

unchanged at +1.1% y/, indicating that upward pressure from the sector might

have peaked.

--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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