MNI INSIGHT: BOJ Sees CPI Pickup To Support Bid For 2%

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials are confident that the latest pickup

in consumer prices will continue to support the path toward the bank's 2%

inflation target but they remain cautious because it takes some time before slow

wage and price hikes will boost CPI, MNI understands.

     A slight pickup in the pace of year-on-year gains in the consumer price

index released Tuesday is the last piece of CPI data before the BOJ board holds

its next policy meeting on Jan. 22-23, when it also updates its medium-term

growth and inflation projections in the quarterly Outlook Report.

     At this point, there is no hard data to suggest that the board should lower

its core CPI forecasts again in January after revising its median forecast for

fiscal 2017 down to +0.8% in October from +1.1% projected in July and the one

for fiscal 2018 down to +1.4% from +1.5%.

     Despite expected fading of support from past energy price rises, it is too

early to consider pushing back the bank's estimated timing of achieving the 2%

price stability target from fiscal 2019, when the board expects core CPI

(excluding fresh food) to rise 1.8% from the previous year.

     --GRADUAL CPI PICKUP

     Data released Tuesday showed that the national average core CPI (excluding

fresh food) rose 0.9% on year in November for the 11th straight year-on-year

rise, with the pace of increase accelerating from +0.8% in October.

     The year-on-year rise in energy prices slowed to +8.5% in November from

+8.6% in October, which was expected, while the rise in processed food edged up

to +1.1% from +1.0%.

     Goods prices excluding volatile fresh food prices rose 1.8% on year in

November, up from +1.7% in October, reflecting higher import and labor costs.

     By contrast, service prices rose just 0.1% in November after being

unchanged in October, indicating some firms are resisting price hikes amid tough

competition by absorbing higher materials and labor costs by investing in

technology and curtailing business hours.

     Excluding upward pressure from energy prices, the underlying price trend

showed a slight pickup after stagnating.

     The core-core CPI (excluding fresh food and energy) rose 0.3% on year in

November after rising 0.2% in each of the previous three months.

     Total national CPI rose 0.6% on year in November, accelerating from +0.2%

in October in light of a rebound in fresh food prices, but the pace of increase

was still slower than +0.7% in September.

     BOJ economists are closely watching two segments in the CPI data as leading

indicators of the overall price trend.

     The prices for processed food (canned food, bread, snacks, beverages, etc.)

rose 1.0% on year in November after rising at the same pace in October. Those

for durable goods were unchanged in both November and October.

     However, BOJ officials are not too concerned about the slow progress

because the pace of increase in both items rose in the CPI data for central

Tokyo.

     --TOKYO PRICES UP

     The Tokyo core CPI, which sometimes leads the national trend, rose 0.8% on

year in December after rising 0.6% in November, indicating that the year-on-year

rise in the national core CPI in December is expected to accelerate from

November's +0.9%.

     In the capital, the prices for processed food rose 0.8% on year in

December, up from +0.3% in November, while those for durable goods gained 0.4%

on year, up from -0.2%.

     BOJ officials believe that companies are facing more upward pressures to

raise retail sales and wages, compared with several months ago, as materials and

labor costs have risen.

     BOJ officials are hoping that annual wage negotiations between major

corporations and their unions set a firmer tone for people's price outlook for

fiscal 2018 starting in April.

     --UNEMPLOYMENT A BRIGHT SPOT

     Other government data released Tuesday indicate the slow pickup in

inflation will receive some support from tightening labor conditions.

     The seasonally adjusted average unemployment rate fell to 2.7% in November

from 2.8% in October, hitting a 24-year low.

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

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: vince.morkri@marketnews.com

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