MNI INSIGHT: BOJ Still Cautious On Prices; Eyeing Crude Impact

By Hiroshi Inoue

     TOKYO (MNI) - Friday's data will do little to shake the Bank of Japan's

belief that consumer prices will continue to edge higher, although modestly and

at a slower pace than previously expected, MNI understands.

     Stronger capex spending in the fourth quarter will likely see GDP growth

for the corresponding period revised higher, helping underpin the central bank's

view that the economy is recovering at a moderate pace.

     However, there is still unease at the bank that inflation has not yet taken

a firm hold and the BOJ will maintain its cautious outlook on prices,

particularly as the effect of higher energy prices will likely drop out of the

CPI at some point.

     February Tokyo core consumer prices excluding fresh foods and energy, a

leading indicator of the national inflation rate, rose 1.1% on year in February

for the 20th straight rise. It was unchanged from January, but higher than the

MNI median forecast looking for a 1.0% gain.

     --CRUDE PRICES

     February's gain was driven largely by the higher crude prices; +0.44

percentage points against +0.40 percentage points last month and that impact is

expected to diminish around April, pushing core CPI lower unless goods and

service prices accelerate.

     BOJ economists will wait on the annual corporate price revisions expected

in April to assess the impact on goods and service prices and how they feed

through into consumer inflation expectations.

     --EXPECTATIONS

     Inflation expectation will continue to play a key role in the BOJ outlook

and officials will have taken some heart in the modest uptick in the latest

Consumer Sentiment survey, also published Friday.

     Services prices rose 0.8% on year in February, slowing from +0.9% in

January, while prices for eating out rose 1.0% in February, slowing from +1.1%,

indicating firms remain cautious over passing on higher costs. However, some

food and drink firms plan to raise their prices in April.

     The BOJ see higher services prices, including eating out, are necessary for

Japan's inflation rate to accelerate as Japan's services prices are lower than

those of overseas, which are sensitive to labor and material costs.

     There were a couple of bright spots for BOJ economists to focus on; prices

for household durable goods rose 5.0% on year in February, accelerating from

0.5% in January, while goods prices excluding perishables rose 1.7% on year in

February, accelerating from 1.5% in January

     Tokyo CPI is a leading indicator of the national CPI for February, due out

on March 22. It indicates that the core CPI in February will rise 0.8% or higher

on year from +0.8% in January.

--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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