MNI INSIGHT: BOJ See No Rapid CPI Gain, Expectations Sticky

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan sees higher labour and material costs pushing

companies to raise retail prices, putting some upward pressure on CPI, although

no sharp acceleration is seen in the level of inflation and the Quarterly

Outlook report due on Thursday will likely judge the 2% price stability target

will not be achieved by March 2022, MNI understands.

     Although many companies have attempted to absorb higher costs, concerned

higher prices will impact sales, some, particularly in the restaurant and

processed food sectors are passing on the increased labour costs in the form of

price hikes.

     This is having some effect on nationwide inflation levels, but BOJ

officials are uncertain as to strength and sustainability of the move, in

particular how they transfer over into both consumer price expectations and

corporate profitability.

     --SLOW TO RISE

     Consumer prices have lagged Japan's output gap, which, according to the

BOJ, widened to 2.23 percentage points in the October-December quarter, up from

1.26 percentage points in July-September.

     It was the ninth straight quarter with a positive output gap, which should

increase pressure on consumer prices and inflation expectations, albeit with a

lag of a few quarters, although the BOJ expects the positive output gap to have

narrowed in the first quarter.

     --STICKY EXPECTAIONS

     Data released late last week showed Japan's national average core CPI

(excluding fresh food) rose 0.8% on year in March for the 27th  straight

year-on-year rise following +0.7% in February, still a long way shy of the 2%

price target.

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

the underlying trend of inflation -- rose 0.4% on year in March, unchanged from

+0.4% in February.

     Although the BOJ sees the mechanism for higher prices maintained, officials

remain somewhat concerned over their outlook, as inflation expectations are

stickier than expected, failing to gain upward traction - caught needing a

sustainable rise in consumer prices to boost expectations.

     Officials will pay close attention on how annual corporate price revisions

impact central Tokyo consumer price index, a leading indicator of the nationwide

CPI, due out on April 26, the day after the BOJ's latest Board policy meeting

ends, paying attention to prices for processed food and for eating out in order

to examine a strength the impact of corporate hike hikes on CPI.

--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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