MNI INSIGHT: BOJ Sees CPI To Pick Up on Goods Prices in 2018

By Hiroshi Inoue

     TOKYO (MNI) - Bank of Japan officials still expect slow inflation to pick

up in the second half of the year, led by upward pressure from higher materials

and labor costs, despite soft CPI data released Friday, MNI understands.

     The national average core consumer price index (excluding fresh food) was

flat on the month in December, leaving the year-on-year increase at 0.9%,

unchanged from November.

     The 12th straight year-on-year rise was led by gradual gains in goods

prices while service prices remained depressed, largely due to slow wage hikes

and partly due to the government drive to lower mobile communications costs.

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

in December after rising 0.3% in November, indicating consumer price increase

was mainly led by the year-on-year rise in energy costs, which account for about

8% of the total CPI basket.

     --PROCESSED FOOD PRICES UP

     But on the upside, BOJ officials note, the prices for processed food

(canned food, bread, snacks, beverages, etc.), which account for 22% of the

total CPI, have been rising steadily, up 1.0% on year in December after rising

at the same pace.

     The prices for a broader category of foodstuffs excluding fresh food gained

1.2% on year on December, up from the 1.1% rise in November. 

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

December, with the pace of increase unchanged from November. The pace of

increase in overall goods prices reached 2.0% in December, up sharply from the

1.1% rise in November.

     Firms are passing along higher raw materials prices as well as higher

import costs arising from the past depreciation of the yen, the BOJ views.

     BOJ economists believe the bank's cost-push indicator -- which measures the

current upward pressure on prices stemming from a cost increase -- showed that

such upward pressure has been increasing steadily.

     --WEAK SERVICE PRICES

     By contrast, the weakness remains in service prices, which account for just

over a half of the total CPI basket.

     The prices for services ranging from rents and restaurants to medicine and

communications rose just 0.1% in December after rising at the same pace in

November, indicating companies are resisting price hikes amid tough competition

by absorbing higher materials and labor costs by investing in technology and

curtailing business hours.

     --TOTAL CPI IMPACT ON INFLATION EXPECTATIONS

     The core CPI for central Tokyo, which sometimes leads the national trend,

rose 0.7% on year in January, slowing from the 0.8% rise in December.

     In Tokyo, the pace of year-on-year rise in goods prices excluding fresh

food also decelerated to 1.6% in December from 1.7% the previous month.

     But overall goods prices in the capital jumped 2.9% on year from the 2.1%

rise in December as vegetable and fruit prices remained high due to bad weather,

indicating that overall goods prices in the national CPI will accelerate from

the 2.0% gain in December.

     The total CPI in Tokyo marked the third straight year-on-year increase,

rising to 1.3% in January from 1.0% in December, indicating that the national

total CPI will rise further in January from +1.0% in December in data due out on

Feb. 23.

     BOJ economists are monitoring the total CPI, which they believe will

influence inflation expectations among firms and households.

     --OUTPUT GAP IMPROVING

     In the longer term, BOJ officials also expect sustained economic recovery

to help push up consumer prices. The output gap of the economy, which is a

factor of determining inflation rates, has been improving steadily.

     The positive output gap resulting from tighter supply and firmer demand

widened to 1.35 percentage points in the July-September quarter of 2017 from

1.18% points in April-June that year and the BOJ expects it to have risen

further in October-December.

--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

[TOPICS: MMJBJI,MAJDS$,MMJBJ$,M$A$$$,M$J$$$,MT$$$$,MX$$$$]