MNI INSIGHT: BOJ Sees Underlying Prices Up Despite Slow CPI

--BOJ Watching Near-Term Risk of Higher Yen, Lower Oil Prices

By Hiroshi Inoue

     TOKYO (MNI) - Japanese prices are slow to respond to the sustained, modest

economic growth but Bank of Japan officials expect steadily rising costs amid

labor shortages to exert more upward pressure on consumer prices in coming

months, MNI understands.

     BOJ officials believe the momentum toward achieving the 2% inflation target

is maintained as record high corporate profits and a gradual pickup in wages are

leading to increased investment and consumption.

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

0.9% on year in January. The pace of increase was unchanged from 0.9% in

December after it rose to 0.9% in November from 0.8% in October.

     The 13th straight year-on-year rise in January was led by gradual gains in

goods prices while service prices remained weak, largely due to slow wage hikes

and regulated healthcare costs.

     The core-core CPI (excluding fresh food and energy) rose just 0.4% on year

in January after rising 0.3% in December and November, indicating that it takes

considerable time for the underlying inflation trend to pick up and that the

recent increase has relied heavily on higher fuel and utility costs.

     --NEAR-TERM DOWNSIDE RISK

     BOJ officials expect the core CPI to gradually rise but they are vigilant

against the near-term downward move that may be caused by the yen appreciation

this year, which will lower import costs, as well as the recent slide in crude

oil prices.

     The focus is on whether the core CPI will continue rising above the annual

rate of 1.0% in fiscal 2018 starting in April, when some firms are expected to

raise retail prices, reflecting higher raw material and labor costs. Modest base

wage hikes are also expected in the next fiscal year.

     --SOLID GOODS PRICES

     Goods prices excluding volatile fresh food prices rose 1.7% on year in

January, with the pace of increase slowing from +1.8% in December. The pace of

increase in overall goods prices rose 2.7% in January, up sharply from the 2.0%

rise in December in light of continued high prices for fresh vegetable and fish.

     BOJ economists believe their cost-push indicator -- aimed at gauging the

pressure from costs that have not been passed on to prices -- has been rising

gradually since the bank first released its concept in on Nov. 1. At the time,

the BOJ estimated the cost-push indicator stood at around 0.2% in the

July-September quarter, indicating consumer prices were expected to rise by 0.5

percentage point in about six months.

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

accounts for 15% of the total CPI, rose 1.2% on year in January after rising

1.0% in December.

     --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 January after rising at the same pace in

December, indicating companies are resisting price hikes amid tough competition

by investing in technology and curtailing business hours to cut costs.

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

have a large impact on inflation expectations among firms and households because

people pay close attention to the prices of daily necessities.

     The total CPI rose 1.4% on year in January, with the pace of increase

accelerating sharply from the 1.0% rise in December, but the rise was mainly

caused by higher perishable goods, which surged 8.8% on year in January.

--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$$$$,MX$$$$]